I have achieved the thing which you are displaying in image. what i have used was Custom Dialogue as you are thinking to Use. i had used Listview inside the xml file. 
First of all Define initialize the below arraylist.
// Catagory Selection
    public static ArrayList<String> acceptpositionwhoesNearMe = new ArrayList<String>();
    public static String AcceptCatagotyIDWhoesNearMe = "";
Below is the Code showDialog() i have Used.
public void showDialog() {
        Log.i(TAG, "Inside Show Dialog");
        final Dialog warning = new Dialog(logout_dialogue.this);
        warning.requestWindowFeature(Window.FEATURE_NO_TITLE);
        warning.setContentView(R.layout.YOUR_XML);
        warning.setCancelable(false);
        warning.getWindow().setGravity(Gravity.CENTER);
        WindowManager mWinMgr;
        mWinMgr = (WindowManager) this.getSystemService(Context.WINDOW_SERVICE);
        int displayWidth = mWinMgr.getDefaultDisplay().getWidth();
        warning.getWindow().setLayout(displayWidth - 75,
                LayoutParams.WRAP_CONTENT);
        warning.setOnDismissListener(new OnDismissListener() {
            public void onDismiss(DialogInterface dialog) {
                Log.i(TAG, "Inside Dialog interface");
                // test = true;
                warning.dismiss();
            }
        });
        ListView listinterest = (ListView) warning
                .findViewById(R.id.list_catagory);
        /*
         * ArrayList<String> count = new ArrayList<String>(); count.clear();
         * count.add("Hotels"); count.add("Restaurants"); count.add("Gardens");
         * count.add("Theater");
         */
        CatagorySummaryAdapter adapter;
        adapter = new CatagorySummaryAdapter(YOUR_ACTIVITY.this,
                YOUR_ARRAYLIST_OF_CATAGORY, true);
        listinterest.setAdapter(adapter);
        Button btnOk = (Button) warning.findViewById(R.id.btn_close);
        btnOk.setOnClickListener(new OnClickListener() {
            @Override
            public void onClick(View v) {
                // TODO Auto-generated method stub
                String Catagory = "";
                int count = HomeActivity.acceptpositionwhoesNearMe.size();
                if (count > 0) {
                    for (int i = 0; i < HomeActivity.acceptpositionwhoesNearMe
                            .size(); i++) {
                        int pos = Integer
                                .parseInt(HomeActivity.acceptpositionwhoesNearMe
                                        .get(i));
                        if (Catagory.equals("")) {
                            Catagory = GetUserDetailsJsonParser.CategoryName
                                    .get(pos);
                            HomeActivity.AcceptCatagotyIDWhoesNearMe = GetUserDetailsJsonParser.CategoryID
                                    .get(pos);
                        } else {
                            Catagory = Catagory
                                    + ","
                                    + GetUserDetailsJsonParser.CategoryName
                                            .get(pos);
                            HomeActivity.AcceptCatagotyIDWhoesNearMe = HomeActivity.AcceptCatagotyIDWhoesNearMe
                                    + ","
                                    + GetUserDetailsJsonParser.CategoryID
                                            .get(pos);
                        }
                    }
                    Log.i(TAG, "Accept Catagory IDs WhoseNear Me"
                            + HomeActivity.AcceptCatagotyIDWhoesNearMe);
                    GetUserDetailsJsonParser.InterestedIn = HomeActivity.AcceptCatagotyIDWhoesNearMe;
                    UpdateMap = true;
                    /*
                     * startActivity(new Intent(WhosNearMe.this,
                     * BuildInukshk_4.class));
                     */
                    new GetUsersInRadiusAsyncTask().execute();
                    warning.dismiss();
                } else {
                    Toast.makeText(WhosNearMe.this,
                            "Please Select One or More Catagory", 3).show();
                }
                // test = true;
            }
        });
        warning.show();
    }
Here is My logout_dialogue.xml :
<LinearLayout xmlns:android="http://schemas.android.com/apk/res/android"
    android:layout_width="fill_parent"
    android:layout_height="fill_parent"
    android:background="@drawable/edittext_back_final"
    android:orientation="vertical" >
    <LinearLayout
        android:id="@+id/linearLayout1"
        android:layout_width="fill_parent"
        android:layout_height="fill_parent"
        android:orientation="vertical" >
        <LinearLayout
            android:layout_width="fill_parent"
            android:layout_height="wrap_content" >
            <com.inukshk.CustomTextViewBold
                android:layout_width="fill_parent"
                android:layout_height="wrap_content"
                android:layout_marginLeft="10dp"
                android:layout_marginTop="10dp"
                android:text="Interested in"
                android:textColor="#3C3C3C"
                android:textSize="18sp"
                android:textStyle="bold" />
        </LinearLayout>
        <ListView
            android:id="@+id/list_catagory"
            android:layout_width="fill_parent"
            android:layout_height="0dp"
            android:layout_marginLeft="10dp"
            android:layout_marginTop="10dp"
            android:layout_weight="1"
            android:cacheColorHint="#00000000"
            android:divider="@android:color/transparent" >
        </ListView>
        <Button
            android:id="@+id/btn_close"
            android:layout_width="99dp"
            android:layout_height="40dp"
            android:layout_alignParentLeft="true"
            android:layout_marginLeft="10dp"
            android:background="@drawable/btn_back_final"
            android:text="CLOSE"
            android:textColor="#ffffff"
            android:textSize="16dp"
            android:textStyle="bold" />
    </LinearLayout>
</LinearLayout>
here is My CatagorySummaryAdapter.java : 
package com.inukshk.adapter;
import java.util.ArrayList;
import android.app.Activity;
import android.content.Context;
import android.util.Log;
import android.view.LayoutInflater;
import android.view.View;
import android.view.ViewGroup;
import android.widget.BaseAdapter;
import android.widget.CheckBox;
import android.widget.CompoundButton;
import android.widget.CompoundButton.OnCheckedChangeListener;
import android.widget.RelativeLayout;
import android.widget.TextView;
import com.inukshk.HomeActivity;
import com.inukshk.R;
import com.inukshk.CreateInukshk.BuildInukshk_3;
import com.inukshk.WhosNearMe.WhosNearMe;
public class CatagorySummaryAdapter extends BaseAdapter {
    public Activity context;
    String TAG = "CatagorySummaryAdapter";
    public LayoutInflater inflater;
    public ArrayList<String> Count;
    boolean Dialogue;
    public CatagorySummaryAdapter(Activity context, ArrayList<String> Count,
            boolean Dialogue) {
        super();
        this.context = context;
        this.inflater = (LayoutInflater) context
                .getSystemService(Context.LAYOUT_INFLATER_SERVICE);
        this.Count = Count;
        this.Dialogue = Dialogue;
        // TODO Auto-generated constructor stub
    }
    @Override
    public int getCount() {
        // TODO Auto-generated method stub
        return Count.size();
    }
    @Override
    public Object getItem(int position) {
        // TODO Auto-generated method stub
        return Count.get(position);
    }
    @Override
    public long getItemId(int position) {
        // TODO Auto-generated method stub
        return position;
    }
    @Override
    public int getItemViewType(int position) {
        // TODO Auto-generated method stub
        return position;
    }
    public class ViewHolder {
        RelativeLayout lsummary_row;
        TextView txtinterestname;
        CheckBox chkinterest;
    }
    @Override
    public View getView(int position, View convertView, ViewGroup parent) {
        // TODO Auto-generated method stub
        int pos = position;
        ViewHolder holder;
        if (convertView == null) {
            holder = new ViewHolder();
            if (Dialogue) {
                convertView = inflater.inflate(
                        R.layout.listview_summary_dialogue_row, null);
            } else {
                convertView = inflater.inflate(R.layout.listview_summary_row,
                        null);
            }
            holder.txtinterestname = (TextView) convertView
                    .findViewById(R.id.txtinterestname);
            holder.lsummary_row = (RelativeLayout) convertView
                    .findViewById(R.id.lsummary_row);
            holder.chkinterest = (CheckBox) convertView
                    .findViewById(R.id.chkinterest);
            holder.chkinterest.setEnabled(true);
            holder.chkinterest.setTag(position);
            if (Dialogue) {
                for (int i = 0; i < HomeActivity.acceptpositionwhoesNearMe.size(); i++) {
                    int index = Integer
                            .parseInt(HomeActivity.acceptpositionwhoesNearMe
                                    .get(i));
                    // Log.i(TAG, "Inside for Loop of Accept Positions");
                    if (index == position) {
                        // Log.i(TAG, "Matched for index" + index);
                        holder.chkinterest.setChecked(true);
                        holder.chkinterest
                                .setButtonDrawable(R.drawable.checkbox_checked);
                    }
                }
            } else {
                for (int i = 0; i < BuildInukshk_3.acceptposition.size(); i++) {
                    int index = Integer.parseInt(BuildInukshk_3.acceptposition
                            .get(i));
                    // Log.i(TAG, "Inside for Loop of Accept Positions");
                    if (index == position) {
                        // Log.i(TAG, "Matched for index" + index);
                        holder.chkinterest.setChecked(true);
                        holder.chkinterest
                                .setButtonDrawable(R.drawable.checkbox_checked);
                    }
                }
            }
            convertView.setTag(holder);
        } else {
            holder = (ViewHolder) convertView.getTag();
        }
        holder.chkinterest
                .setOnCheckedChangeListener(new OnCheckedChangeListener() {
                    @Override
                    public void onCheckedChanged(CompoundButton buttonView,
                            boolean isChecked) {
                        // TODO Auto-generated method stub
                        // Log.i(TAG, "ISChecked is " + isChecked);
                        if (isChecked) {
                            // Log.i(TAG, "ISChecked is true");
                            buttonView
                                    .setButtonDrawable(R.drawable.checkbox_checked);
                            int position = Integer.parseInt(buttonView.getTag()
                                    .toString());
                            if (Dialogue) {
                                HomeActivity.acceptpositionwhoesNearMe.add(String
                                        .valueOf(position));
                                Log.i(TAG, "Accept ID of Dialogue"
                                        + HomeActivity.acceptpositionwhoesNearMe);
                            } else {
                                BuildInukshk_3.acceptposition.add(String
                                        .valueOf(position));
                                Log.i(TAG, "Accept ID"
                                        + BuildInukshk_3.acceptposition);
                            }
                        } else {
                            // Log.i(TAG, "ISChecked is false");
                            buttonView
                                    .setButtonDrawable(R.drawable.checkbox_unchecked);
                            int position = Integer.parseInt(buttonView.getTag()
                                    .toString());
                            if (Dialogue) {
                                if (HomeActivity.acceptpositionwhoesNearMe
                                        .contains(String.valueOf(position))) {
                                    // Log.i(TAG,
                                    // "Inside Already present position");
                                    HomeActivity.acceptpositionwhoesNearMe
                                            .remove(String.valueOf(position));
                                    Log.i(TAG,
                                            "Accept ID Dialogue***"
                                                    + HomeActivity.acceptpositionwhoesNearMe);
                                }
                            } else {
                                if (BuildInukshk_3.acceptposition
                                        .contains(String.valueOf(position))) {
                                    // Log.i(TAG,
                                    // "Inside Already present position");
                                    BuildInukshk_3.acceptposition.remove(String
                                            .valueOf(position));
                                    Log.i(TAG, "Accept ID ***"
                                            + BuildInukshk_3.acceptposition);
                                }
                            }
                            //
                        }
                    }
                });
        holder.txtinterestname.setText(Count.get(pos));
        return convertView;
    }
}
try to go through it might help you.