Okay - so we are reasonable confused at this point, so lets reset. The kernel and userland have rather different concepts of what the "console" is. Its rather possible that the kernel and userland are using different consoles based on a number of factors. The reason why I suggested that he try the CONSOLE= bit is that many distro initscripts use CONSOLE= grep for CONSOLE in /etc/ on your desktop and you will see evidence of this. Now, that, said, that doesn't always work, and I'm looking at busybox right now for some clues.
It looks like busybox looks for /dev/console and /dev/tty first off, so we need to make sure that those devices are both available and active. You may also want to add a getty line in your inittab to open a getty on ttyS0, so even if you don't have the console output, you should still have a login prompt.
Long story short - this is a userland issue, and not really a kernel or hardware problem.
Jordan