If there still not showing in the drop box.
1. Check permissions again via the control panel "Permissions Check"
2. Regardless if you allow certain groups to see or not see the ads they should still appear in the drop box your attempting show them.
3. I dont have <?php php?> tags in my custom island code.
4. when you get the islands to show in the drop box then think about who you want to show them too.
5. Modify the permissions for "View Ads" this is the section between 1st n second posts.
I'm over in the UK its 22:22 and i have a love life lol
I'm sure one of the others will guide you.
An After thought ?
Go to custom island 1
Take the code out and replace with
$body = <<<EOF
Hello I am a Test
6. Check your drop boxes again.
Thats it for now.
What ever it is, its an oversight and can be fixed with the attention to detail.
Its something stupid now.