Tried the following:

1) Added the dnsmasq line to my NetworkManager.conf
2) Manually edited resolv.conf to be the 127.0.0.1

After doing this, when I connect to the vpn it now uses VPN's
nameservers, The only problem is the "search" domain not is used so I
have to use the FQDN every time.

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https://bugs.launchpad.net/bugs/993523

Title:
  VPN Connections Don't Replace Nameserver

Status in “network-manager” package in Ubuntu:
  Incomplete

Bug description:
  For both PPTP and VPNC connections from the network manager gui, the
  nameservers in /etc/resolv.conf no longer get replaced. Instead, it
  only appends the new name servers (And search domain) to the end of
  the file.

  This causes DNS to not work properly as it doesn't query the name
  servers given by the VPN connection first.

  ProblemType: Bug
  DistroRelease: Ubuntu 12.04
  Package: network-manager 0.9.4.0-0ubuntu3
  ProcVersionSignature: Ubuntu 3.2.0-24.37-generic 3.2.14
  Uname: Linux 3.2.0-24-generic x86_64
  NonfreeKernelModules: fglrx
  ApportVersion: 2.0.1-0ubuntu7
  Architecture: amd64
  CRDA: Error: command ['iw', 'reg', 'get'] failed with exit code 1: nl80211 
not found.
  Date: Wed May  2 15:20:40 2012
  IwConfig:
   lo        no wireless extensions.
   
   eth0      no wireless extensions.
   
   tun0      no wireless extensions.
  NetworkManager.conf:
   [main]
   plugins=ifupdown,keyfile
   
   [ifupdown]
   managed=true
  NetworkManager.state:
   [main]
   NetworkingEnabled=true
   WirelessEnabled=true
   WWANEnabled=true
   WimaxEnabled=true
  RfKill:
   
  SourcePackage: network-manager
  UpgradeStatus: Upgraded to precise on 2012-05-02 (0 days ago)
  modified.conffile..etc.NetworkManager.NetworkManager.conf:
   [main]
   plugins=ifupdown,keyfile
   
   [ifupdown]
   managed=true
  mtime.conffile..etc.NetworkManager.NetworkManager.conf: 
2012-02-28T21:12:35.862903
  nmcli-con:
   NAME                      UUID                                   TYPE        
      TIMESTAMP    TIMESTAMP-REAL                     AUTOCONNECT   READONLY   
DBUS-PATH                                 
   SE-NY Cisco               5c61cd44-9337-4744-9507-6d344ca87d0c   vpn         
      1335989892   Wed 02 May 2012 03:18:12 PM EST    no            no         
/org/freedesktop/NetworkManager/Settings/2
   SE-NY                     70b9d278-f103-4134-ad12-8adbc84404ae   vpn         
      1335989684   Wed 02 May 2012 03:14:44 PM EST    no            no         
/org/freedesktop/NetworkManager/Settings/1
   Ifupdown (eth0)           681b428f-beaf-8932-dce4-687ed5bae28e   
802-3-ethernet    1335989892   Wed 02 May 2012 03:18:12 PM EST    yes           
yes        /org/freedesktop/NetworkManager/Settings/0
  nmcli-dev:
   DEVICE     TYPE              STATE         DBUS-PATH                         
         
   eth0       802-3-ethernet    connected     
/org/freedesktop/NetworkManager/Devices/0
  nmcli-nm:
   RUNNING         VERSION    STATE           NET-ENABLED   WIFI-HARDWARE   
WIFI       WWAN-HARDWARE   WWAN      
   running         0.9.4.0    connected       enabled       enabled         
enabled    enabled         disabled

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