SharePoint comes with a great new menu control called AspMenu, for displaying both top menu and quick launch (left menu). This control has several cool properties (most inherited from ASP.NET 2.0 Menu control. One of them is MaximumDynamicDisplayLevels.
This control can be found in the default.master page. Out of the box, this property is set to 1. If you change this property to a higher number, it will display several levels of fly-out menu items (if you have subsites under sites and so on.
Check out this great article from Heather Solomon with step-by-step on how to set this up.
If you do run in trouble, check out these tips:
- Make sure that you have checked "Show subsites" in the Navigation Settings
- In default.master, when not modified after installation, there are two menu objects: "QuickLaunchMenu" and "TopNavigationMenu". Make sure you make changes on the correct one, which is "TopNavigationMenu"
- When you have made the change and saved the master page, make sure you also publish it! Otherwise, only you will see the changes, and no one else.