I haven't had much experience with dnsmasq, however, it appears that you are missing the address declarations.
The way I understand dnsmasq, it overrides specific values if they exist, otherwise it queries upstream. So, if you don't have the address declarations, it will query upstream.
Check out
http://rhodesmill.org/brandon/2008/tomato-reverse-dns/ It covers setting up dnsmasq (on a linksys router running tomato firmware...) to specify local names for his computers. Hopefully that helps.