hmm, i use dnsmasq.
i do mine similar to yours:

sudo apt-get install dnsmasq
sudo xedit /etc/dhcp3/dhclient.conf
prepend domain-name-servers 127.0.0.1, 208.67.222.222, 208.67.220.220;

sudo xedit /etc/dnsmasq.conf
listen-address=127.0.0.1
(i also increase the cache, but it's not necessary)

then just reboot and your good to go