The level drops.
When the cannonball is in the water it is displacing a volume of water equivalent to the volume of the cannonball.
When the cannonball is in the boat the volume of water displaced is related to the mass of the cannonball. Since the cannonball has a greater density than the water, then the volume of water displaced is greater than the volume of the cannonball.
Therefore more water is displaced when the cannonball is in the boat than when it is in the water.
For a more scientific answer (with formulae!) see friedlinguini's first posting.
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