Drupal 7: Best Practice for a Dynamic Select List in Drupal 7

Question

What is the best practice for a dynamic select list in Drupal 7?

1. Create a Field with dummy options via the UI and overriding the options with hook_form_FORM_

Answer 1

The callback for the answer from wildpeaks should be:

function mymodule_ajax_callback($form, $form_state) {
    return render($form['dropdown_second']);
}