Sorry, you're right, it doesn't work. Apple's apparently changed that in Lion, and I didn't go back and test in my Snow Leopard system.
That picture is pulled from your account information - it's the one set on the Password tabs. There doesn't appear to be any way to remove the picture completely. You can, however, select another picture - you could make a blank image if you don't want anything at all - or as a rather crazy workaround, double-click on the picture in Address Book, slide the zoom control all the way to the right so that the selection rectangle is small, then drag the picture to be completely outside that rectangle. Note that either affects your account picture, so your image next to your login, if you have the login screen option set to "list of users" will reflect any changes you make.
Regards.