I am using Visual Studio 1.0 to develop a windows application that
reads data from SQL200 using a dataset, This is working fine but I
would like to add a dropdown list (comboBox) to one of the columns in
the grid inorder to restrict values to items that are in the list.
These items are are located in a seperate table. Can this be done on a
windows from I found an article on how to achive this using ASP but
that does not seem to work on a Windows form.

As long as your columns widths and row heights are predictable you
could just overlay a combo box on top of the grid.  Whenever the
cursor enters that cell where you want the combo, move the combobox on
top of where you are and then make it visible.  when the user tabs out
of the combo use set focus, etc. to put the cursor back where they
expect it to be in the next cell and make the combo invisible again. 
Kinda cludgy but I think it would work.  Hope this helps.