Could someone please update the dnsmasq package so that /etc/rc.d/dnsmasq init script sources /etc/conf.d/dnsmasq, such as gentoo does.

This can be added easily by "[ -f /etc/conf.d/dnsmasq ] && ./etc/conf.d/dnsmasq" to the top of the init script and then $DNSMASQ_OPTS to the line which runs the executable. Thanks.

(from the gentoo wiki discussing it. openntpd, lighthttpd, etc, all do this so configuration is easier to look at.)
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File: /etc/dnsmasq.conf

# The DHCP server needs somewhere on disk to keep its lease database.
# This defaults to a sane location, but if you want to change it, use
# the line below.
dhcp-leasefile=/var/lib/misc/dnsmasq.leases

2. Alter /etc/conf.d/dnsmasq
File: /etc/conf.d/dnsmasq

DNSMASQ_OPTS="-l /var/lib/misc/dnsmasq.leases"

The '-l' option tells dnsmasq to look to the leases file for hostnames. So now you don't have to worry about maintaining a static hosts file.