Out-of-the-box SharePoint doesn't provide a way to cascade drop downs in list forms. Luckily, jQuery provides a way to implement cascading drop downs in SharePoint list forms. Here is the step by step implementation guide:

We need to have two more lists to implement this. Lets say:

List 1: Parent list, say: Country

List 2: Child list, say: Cities

List 3: Our target list, where we are going to implement the Cascading drop down.

So, Now:

Insert the following code: Just below

<script language="javascript" type="text/javascript" src="/address to document library/jquery-1.3.2.min.js"></script>
<script language="javascript" type="text/javascript" src="/address to document library/jquery.SPServices-0.4.8.min.js"></script>
<script language="javascript" type="text/javascript">
$(document).ready(function() {
$().SPServices.SPCascadeDropdowns({
relationshipList: "Cities",
relationshipListParentColumn: "Country",
relationshipListChildColumn: "Title",
parentColumn: "Country",
childColumn: "City",
debug: true
});
});
</script>

Here:
relationshipList: “Cities” : this is the name of the relationsship list = the list containing parent and child
relationshipListParentColumn: “Country” : Column name from the Cities list
relationshipListChildColumn: “Title” : Column name from the Cities list
parentColumn: “Country”: Column name from the list where the drop down is = Vacation Plans
childColumn: “City”: Column name from the list where the drop down is = Vacation Plans

1. Download the jquery-1.3.2.min.js by Jquery.com, from the below link

http://code.google.com/p/jqueryjs/downloads/detail?name=jquery-1.3.2.min.js

2. Download spservices (jquery.SPServices-0.5.6.min.js) from the codeplex link

http://spservices.codeplex.com/

3. After downloading upload these two files in a document library

4. In SharePoint Designer, create your own NewForm.aspx (and EditForm.aspx)

Cascading drop down example- What you will get as output is: