I (now) have Internet Sharing working with OS X 10.7.3. 🙂
My network setup is very similar to yours as I also live in a rural area where the best available broadband service is a 3G mobile service that uses a USB dongle. I have a fixed ethernet LAN and a wireless network based on a Time Capsule.
When I first tried using Internet Sharing with 10.7.3 on my network, “it just worked” and I was delighted. However, my delight was short-lived.
When I went to install an Airport Express to extend the wireless range of my network, the on-line services offered to upgrade the firmware of my Time Capsule, Airport Express and the Airport Utility. I accepted these upgrades and that’s when it all turned to custard and I experienced problems and frustrations exactly as you have described.
After about half a day of experimenting, I managed to find out what was going on, and to develop a solution, which is now working just fine. (Details follow)
For the record, my network setup is as follows.
1. USB dongle connected to Mac Mini with OS 10.7.3
2. Mac Mini connected to an Ethernet LAN with a Cisco router providing DHCP services for the entire network.
3. Various printers are connected to the LAN with fixed IP addresses as well as an old G4 desktop.
4. My Time Capsule is connected to the LAN with a fixed IP address and is set to bridging mode so that the Cisco DHCP addresses are sent to devices on the ethernet LAN and on the wireless LAN.
5. On the wireless LAN I have two MacBook Airs running Snow Leopard (10.6.8), a MacBook Pro running Lion (10.7.3) and an iPad 2. All devices on the Wireless LAN are set to use DHCP.
Here’s what I found out about Internet Sharing. I have never seen this in writing, so what follows was discovered by trial and error.
My main clue was the message that is displayed when you turn on Internet Sharing…
“If your computer is connected to a network, turning on Internet Sharing may affect the network settings of other computers and disrupt the network.”
This information is exactly correct, but not very helpful. Nor is the advice, which says, “Contact your system administrator before turning on Internet Sharing. (I am the System Administrator, so where does that get me!!)
To start Internet Sharing I click on “Start” for Internet Sharing (in System Settings>Sharing>Internet Sharing, with (in my case) Ethernet selected for “connect to computers using…” because I want to share the Mac Mini’s Internet Connection via the ethernet LAN).
What now happens is that the Mac Mini assigns itself two further IP addresses in addition to the fixed address that I have already assigned it.
The two further addresses are as follows:
1. Assigned address (server?) 192.168.2.2
2. Router address 192.168.2.1
The subnet mask is set to 255.255.255.0 – which it probably was already.
In addition the Mac Mini will then act as a DHCP server and supply IP addresses and other configuration information to all of the devices that are set to use DHCP. (You may need to click on “Renew DHCP Lease in System Preferences>Network>(Ethernet or Airport as applicable for the machine concerned)>Advanced>TCP/IP in order to see the new address.)
The client machine IP addresses are to set to unique unused addresses in the subnet range (192.168.2.XXX) and the subnet mask on the client machine is set to 255.255.255.0 and the router address to 192.168.2.1.
At this point, the client machines will probably by able to access the Internet – however this mucks up the performance of any devices on the network that have fixed IP addresses, because they will (most likely) be on a different subnet.
The way I got around this issue was rearrange my network addressing scheme (before turning on Internet Sharing) to use the subnet 192.168.2.XXX, but taking care to avoid the early addresses 192.168.2.1 to 192.168.2.90 (say) for fixed addresses. Then turn on Internet Sharing, (and reset the DHCP leases if necessary) and bingo – everything works.
I am delighted to have my network and internet sharing working again. So far everything is now fine, and has been so for the last 24 hours.
I hope this information is helpful to you and others who have been struggling with this issue. It would have been nice if Apple had provided some better advice or information to help us through this setup. 🙂