you are correct:
root@endianfw:/etc/dnsmasq # /usr/sbin/dnsmasq -v
Dnsmasq version 2.38 Copyright (C) 2000-2007 Simon Kelley
Compile time options IPv6 GNU-getopt no-ISC-leasefile no-DBus no-I18N TFTP
Thats why it doesn't work with ICS DHCPd, it is not compiled with the support for it.
So someone needs to compile it with ICS support.