I have a MacBook Pro with Mountain Lion 10.8. I am connecting to the Internet via a USB Internet Key. I enabled internet sharing via WiFi.
My friend has a MacBook Pro with Lion 10.7.
When I enable WPA2 Personal with a password, he gets "connection timeout" when clicking on my network name (even before entering the passcode). When I select "none" for security (no passcode), he has no issues connecting.
By request, I've added a screenshot showing that my only options are WPA2 or 'None':