LTSP udhcpc issue

This is what happens on the thin client (I can only take a screenshot):
https://dl.dropboxusercontent.com/u/12668653/Pictures/udhcpc_failing.png

This is the log on the server:

Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 available DHCP range: 172.16.0.20 -- 172.16.0.50
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 vendor class: udhcp 0.9.9-pre
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 DHCPDISCOVER(br0) 52:54:00:c5:0e:33
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 tags: br0
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 DHCPOFFER(br0) 172.16.0.20 52:54:00:c5:0e:33
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 requested options: 1:netmask, 3:router, 6:dns-server, 12:hostname,
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 requested options: 15:domain-name, 17:root-path, 28:broadcast,
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 requested options: 40:nis-domain, 41:nis-server, 42:ntp-server
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 bootfile name: /ltsp/i386/pxelinux.0
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 next server: 172.16.0.1
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  1 option: 53:message-type  02
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  4 option: 54:server-identifier  172.16.0.1
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  4 option: 51:lease-time  00:00:a8:c0
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  4 option: 58:T1  00:00:54:60
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  4 option: 59:T2  00:00:93:a8
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  4 option:  1:netmask  255.255.255.0
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  4 option: 28:broadcast  172.16.0.255
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  4 option:  3:router  172.16.0.1
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size:  4 option:  6:dns-server  172.16.0.1
Nov 21 14:59:03 Ashton dnsmasq-dhcp[317]: 2840456473 sent size: 14 option: 17:root-path  /opt/ltsp/i386

The dnsmasq config is as follows:

roland@Ashton:/opt/ltsp$ egrep -rv '^#|^$' /etc/dnsmasq*
/etc/dnsmasq.conf:interface=br0
/etc/dnsmasq.d/libvirt-bin:bind-interfaces
/etc/dnsmasq.d/libvirt-bin:except-interface=virbr0
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:port=53
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:domain-needed
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:bogus-priv
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:log-dhcp
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:tftp-root=/var/lib/tftpboot
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:dhcp-boot=/ltsp/i386/pxelinux.0
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:dhcp-option=17,/opt/ltsp/i386
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:dhcp-no-override
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:pxe-prompt="Press F8 for boot menu", 3
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:pxe-service=X86PC, "Boot from network", /ltsp/i386/pxelinux
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:pxe-service=X86PC, "Boot from local hard disk", 0
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:dhcp-range=172.16.0.20,172.16.0.50,255.255.255.0,12h
/etc/dnsmasq.d/ltsp-server-dnsmasq.conf:dhcp-option=252,"\n"
/etc/dnsmasq.d-available/libvirt-bin:bind-interfaces
/etc/dnsmasq.d-available/libvirt-bin:except-interface=virbr0

The file /opt/ltsp/i386/usr/share/initramfs-tools/scripts/init-premount/udhcp has been modified:

if udhcpc -n -s /tmp/dhcp-script.sh -i $i $hostname_param $ip_param >/dev/null 2>&1; then

After modification, the following was run:

$ sudo chroot /opt/ltsp/i386 update-initramfs -u
$ sudo ltsp-update-kernels

Thereafter we have this:

$ cat /var/lib/tftpboot/ltsp/i386/pxelinux.cfg/default
default ltsp
label ltsp
kernel vmlinuz
append ro initrd=initrd.img quiet splash nbdport=2002 nbdroot=:ltsp_i386

Even after rebuilding the client chroot as below, there is no change in behaviour.

$ sudo ltsp-update-image -a i386 -o "quiet splash nbdport=2002"