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If you have a 2008R2 or 2008 server running WDS and DNS, you may run into an issue where the client boots, gets an IP address but fails to load the PXE environment with the error:

WDS PXE-E32: TFTP open timeout

I stumbled upon a number of sites claiming this issue is due to a misconfigured pxe boot file, but I found this issue can be caused by the DNS service binding to WDS UDP ports on the server.  This will generally occur after security update MS08-037 is installed on the server.

Fix WDS PXE-E32: TFTP open timeout

To do this, follow these steps:

1. Start Registry Editor. To do this, click Start , type regedit in the Start Search box, and then press ENTER.
2. Navigate through the regisrty to find the key:
   HKEY_LOCAL_MACHINE\System\CurrentControlSet\Services\WDSServer\Parameters
3. Right-click UdpPortPolicy, and then click Modify.
4. In the Value data box, type 0, and then click OK.
5. Close the registry editor
6. Open the Windows Deployment Services (WDS) snap-in and restart the WDS server

References

http://support.microsoft.com/kb/977512

http://social.technet.microsoft.com/Forums/en/winserversetup/thread/09dba546-2b1d-4330-8927-95f8653cb806

http://support.microsoft.com/kb/953230