I like where you're taking this. I also belive that you could use some more difinition on the water, and I agree with jalonso, the birds are out of place.
If you get a chance before the challenge is over, I threw together a quick edit for you. Its posted in the challenge thread. I hope it can help you out.
@ All: I actually tried putting ripples around each of the islands to distinguish them, but I couldn't make it look good. Trust me, I tried. I've been trying to do it again now that you guys commented, but I still can't really get an effect that I'm happy with. I'll probably just leave it like it is.
I love this.
I think that adding shadows and more color as mentioned below is not really needed because I like that it looks both in water and floating. If anything I would only use white on the waters edge to have it read as water and make it all pop more since white is so underused.
...hate, hate, hate the birds 
Like mrsimons said, you should try and add some shadows in the water so then they don't look like islands floating in the sky.
Looks very cute, i think the water could do with more shadows though.
kinda like fez style