1) download following add on from codeplex from following link
how to install this addon in sharepoint environment that i shown in following post
http://sharepointuniverseforsolution.blogspot.com/2009/11/installation-of-site-template-for.html
2) setup sharpeoint list as follow
lets say there is countries list as follow

then create a city list as follow that will be filter by selected country

3) create another list that contains cascading dropdown column as follow
lets say its name as "test"
here , Country column will be parent column and city column will be child column
so create first parent column for country by setting type as "parent control" as follow.

and then create a city column as child control as follow by assigning type as "Child Control"

now test it as follow

Select Germany and get a list of German cities:

Thanks & Regards,
Dipti Chhatrapati
Enjoy Sharepoint Programming !!!
Dipti Chhatrapati
Enjoy Sharepoint Programming !!!