The following is cut and pasted directly from the Excel help files.
Type the entries for the dropdown list in a single column or row. Do not include blank cells in the list.
If you type the list on a different worksheet from the data entry cell, define a name for the list.
Select the cell, range of cells, or nonadjacent selections that you want to name.
Click the Name box at the left end of the formula bar .
Type the name for the cells.
Note You cannot name a cell while you are changing the contents of the cell.
If you type the list in a different workbook, define a name with an external reference to the list.
Open the workbook that contains the list of dropdown entries.
Open the workbook where you want to validate cells, point to Name on the Insert menu, and then click Define.
In the Names in workbook box, type the name.
In the Refers to box, delete the contents, and keep the insertion pointer in the box.
On the Window menu, click the name of the workbook that contains the list of dropdown entries, and then click the worksheet that contains the list.
Select the cells containing the list.
In the Define Name dialog box, click Add, and then click Close.
Select the cell where you want the dropdown list.
On the Data menu, click Validation, and then click the Settings tab.
In the Allow box, click List.
If the list is in the same worksheet, enter a reference to your list in the Source box.
If the list is elsewhere, enter the name you defined for your list in the Source box.
Make sure the reference or name is preceded with an equal sign (=).
Make sure the In-cell dropdown check box is selected.
Specify whether the cell can be left blank: Select or clear the Ignore blank check box.
To display optional input instructions when the cell is clicked, click the Input Message tab, make sure the Show input message when cell is selected check box is selected, and then fill in the title and text for the message.