PROBLEM
The Cisco 1200 Access Point is not assigning DHCP addresses to clients.

RESPONSE
The AP1200 is a layer 2 bridge device. 
It is incapable of acting as a dhcp server.
It does not care about what type of packets pass through it since it isn't smart enough.

SOLUTION
Configured a DHCP server on the ethernet LAN behind the access point.
The AP passes DHCP packets between the client and the server.