Check where your traffic is coming from when running local PPC.
Just saw this today. Caught me by surprise. (this could just as easily show up in the PPC category)
I checked the origin of sites by states to my site off the log analyser. I assume this is based upon server sites.
Started thinking about this a week or 2 ago when, while speaking with a friend while he was in his office. Had him run my site on a couple of different keywords...and my locally generated ads weren't showing up.
He copied the G serps...and they weren't showing...but neither were those of the local competition.
Today I checked source of traffic by geography...and expanding these locally focused ads (with the geo description and service in them) by a significant region would increase the ads penetration by 25%.
I'm sure this has been reported and figured out before...but it was a first for me.
The IP block that your friend was using may have been recognised as outside your target area, which would explain why local ads weren't showing. Either that or you had reached your daily budget