Having the same issue. It's whack because even if I lower the brightness in game on xbox 360 or ps3, it's still too bright and you can see all the pixels, ect. 
It's fixed in the latest 10.7.2 beta. Just a little longer now!
My brightness controls now work!
Ever since installing the latest security update from Apple. I downloaded it maybe 3-4 days ago or whenever it came out, and finally restarted the computer last night. And back to normal FINALLY!
Call me skeptical, cause I am.I don't see how a security update could fix it.
Beats the hell out of me, but it hasn't worked for a while now until this security update and a restart.
It can't be the restart either because I have restarted the computer not even a week ago.
Well, I've no way to test without upgrading to 10.6.8, and there's no way in heck I'm doing that without further confirmation. Thanks for your findings, though! Anyone else able to confirm it?
I'm running 10.7.1 with all the latest software and security updates, and I still cannot change the brightness in target display mode, so no, It's definitely not been fixed here either.
Just wait for 10.7.2. It'll be out when the iPhone 5 is out to coincide with iCloud, and it's confirmed fixed there in the dev builds. So 2 weeks or so.