Another update. (This is running on Karmic beta, with dnsmasq-base
2.50-1.)

Hopefully this diagram will make sense.
Client (10.42.43.11)  <---> (10.42.43.1) [eth1] Ubuntu [eth0] (192.168.1.144) 
<---> (192.168.1.1) router <---> Internet

When I boot my Ubuntu machine with both interfaces active and the
network sharing turned on, then I have the problem with the DNS
failures. However, if I then disable eth1 and re-enable it, then
everything works.

-- 
NetworkManager Internet Connection Sharing fails to route DNS
https://bugs.launchpad.net/bugs/389006
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