Hey, what is your local interface set too? Is it in the 10.x.x.x range as well?
Have a look and see what your magic-vlan is set to (vlan 3333) and then see if this overlaps with your local interface. You can do this using the command below :
Instant-105# show dhcp-allocation
---------------------/etc/dnsmasq.conf--------------------
listen-address=127.0.0.1
addn-hosts=/etc/ld_eth_hosts
addn-hosts=/etc/ld_ppp_hosts
dhcp-src=172.31.98.1
dhcp-leasefile=/tmp/dnsmasq.leases
dhcp-authoritative
filterwin2k
#magic-vlan
{
vlan-id=3333
dhcp-range=172.31.98.3,172.31.99.254,255.255.254.0,8m
dhcp-option=1,255.255.254.0
dhcp-option=3,172.31.98.1
dhcp-option=6,4.4.2.2
dhcp-option=15,test
dhcp-option=54,172.31.98.1
}
It sounds like the IAP possibly sits on 10.0.0.x and you are also trying to assign IP's from this range as well.
As a test trying using a different DHCP IP range from the IAP and let us know if you can configure that?