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I'm working with a blog that has an advertiser who can only show ads for US/UK... so I'd like to set up an ad server that will show those advertiser's ads for US/UK customers, and then show Google Adsense ads for all other countries.

It seems like DFP Small Business (Google's free ad server product) will do the job for all of this, but I'm not 100% certain it allows geotargeting as I've described. Is that possible?

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Yes, DFP supports geo targeting. When you put the order in for the ads you have to create "line items" for each targeting that you want. Then under each line item, you can add "creatives" which are the ads themselves.

So under the line item that you wish to target, go to "Settings" then "Add Targeting" then "Geography" and choose the countries where you wish the ad to appear.

Here is a screenshot from DFP showing this functionality.

DFP geo targeting

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