Drupal 7.9 and flexible images
Check out theme_image():

foreach (array('width', 'height', 'alt', 'title') as $key) {
  if (isset($variables[$key])) {
    $attributes[$key] = $variables[$key];
  }
}
return '&lt;img' . drupal_attributes($attributes) . ' /&gt;';


So you need to clean width and height as top level keys but also from the attributes array:

function mymodule_preprocess_image(&amp;$variables) {
  unset(
    $variables['width'],
    $variables['height'],
    $variables['attributes']['width'],
    $variables['attributes']['height']
  );
}


And yes, in Drupal 7, Variable process functions can now be used for all theming hooks. Don't forget to clear your cache so the new preprocess function is picked up.