I CHOOSE SITE ACTIONS > MORE OPTIONS
I start off with a fresh site collection for which I have chosen the team site template as the top level site. This can be done from any site for which I have the correct permissions but I like to keep it nice and simple and clean.

I FILTER THE OPTIONS BY CLICKING BLANK & CUSTOM AND THEN FIlL OUT THE FORM AS SHOWN USING THE CUSTOM LIST AT MY TEMPLATE AND THEN CLICK CREATE
I call my list "Pets" because I'm going to make a list of my pets.

I CLICK LIST SETTINGS – THE LIST TAB IS ACTIVE AND THUS THE LIST SETTINGS ICON IS AVAILABLE
I could click Create Columns, however I want to change the Title Column to Pet Name so I'll go to List Settings.

I CLICK ON THE TITLE LINK
In this case, it will make sense to change the Title column to pet name since they are both single lines of text. You cannot delete the Title column.

I REPLACE THE WORD TITLE WITH PetName AND CLICK OK

I CLICK CREATE COLUMN

I ADD A CHOICE COLUMN CALLED TYPE OF PET USING THE OPTIONS: DOG, CAT, LIZARD, SNAKE
I fill out the form as shown and click OK (Button Not Shown)

I CLICK THE PETS LINK IN THE QUICK LAUNCH TO GET TO THE ALL ITEMS VIEW OF THE PETS LIST

I CLICK ADD NEW ITEM

I TAKE A LOOK AT THE OUT OF THE BOX NEW ITEM FORM AND CLICK CANCEL

I CLICK SITE ACTIONS > EDIT IN SHAREPOINT DESIGNER TO OPEN SHAREPOINT DESIGNER 2010.
I could have opened SharePoint Designer 2010 from the start menu; however I prefer this method so I don't accidentally connect to the wrong site.

I SELECT LISTS AND LIBRARIES FROM THE NAVIGATION PANE AND THEN SELECT PETS FROM THE DETAILS PANE.

I CLICK NEW TO CREATE A NEW FORM.
When I created the new custom list, SharePoint 2010 created 3 new forms for me. DispForm.aspx – for displaying all items in the list. EditForm.aspx – for editing existing items in a list and NewForm.aspx which is used to create a new item. (As shown earlier in this post). I will be creating a form and set it as the default new item form so that it will basically replace the NewForm.aspx (although it won't over write it so I can always revert back to using the out of the box form)

I NAME MY FORM AQUAPETFORM (I COULD CALL IT ANYTHING EXCEPT THE EXISTING FILE NAMES MENTIONED ABOVE) SELECT NEW ITEM FORM AND CHECK THE SET AS DEFAULT FORM FOR THE SELECTED TYPE. THEN CLICK OK.
If I am using content types, I can select it from the drop down menu.

I CLICK AQUAFORM.ASPX TO OPEN THE FORM UP IN SHAREPOINT DESIGNER FOR EDITING.

I ADD SOME CUSTOM CONTENT TO MY NEW FORM THEN CLICK SAVE (SAVE NOT SHOWN)
Nothing extravagant here, just something so it's obvious I'm using this version of the form when I add a new item.

I CLICK THE HOME TAB AND THEN CLICK PREVIEW IN BROWSER ICON IN THE RIBBON IN SHAREPOINT DESIGNER 2010

I FILL OUT THE FORM AND HIT SAVE. THIS ADDS A NEW ITEM TO MY CUSTOM LIST
I could have greatly customized this form however that is not the point of this post.
That's it, there are other approaches such as customizing one of the existing forms and even using InfoPath 2010, but this is how you do it with SharePoint Designer 2010 and creating a new custom List Form.