I am assuming this is a collabortation portal, is this correct?

Has anyone played with the default.master page? You can look in SharePoint
designer at the history of the file to determine if changes have been made
if not, the perhaps it is a setting in the naviagation. If changes have
been made it will relate to the ASPMenu control for the topnav. This is an
OOB topnav ASPMenu control:

<SharePoint:AspMenu
ID="TopNavigationMenu"
Runat="server"
DataSourceID="topSiteMap"
EnableViewState="false"
AccessKey="<%$Resources:wss,navigation_accesskey%>"
Orientation="Horizontal"
StaticDisplayLevels="2"
MaximumDynamicDisplayLevels="1"
DynamicHorizontalOffset="0"
StaticPopoutImageUrl="/_layouts/images/menudark.gif"
StaticPopoutImageTextFormatString=""
DynamicHoverStyle-BackColor="#CBE3F0"
SkipLinkText=""
StaticSubMenuIndent="0"
CssClass="ms-topNavContainer">
<StaticMenuStyle/>
<StaticMenuItemStyle CssClass="ms-topnav" ItemSpacing="0px"/>
<StaticSelectedStyle CssClass="ms-topnavselected" />
<StaticHoverStyle CssClass="ms-topNavHover" />
<DynamicMenuStyle BackColor="#F2F3F4" BorderColor="#A7B4CE"
BorderWidth="1px"/>
<DynamicMenuItemStyle CssClass="ms-topNavFlyOuts"/>
<DynamicHoverStyle CssClass="ms-topNavFlyOutsHover"/>
<DynamicSelectedStyle CssClass="ms-topNavFlyOutsSelected"/>
</SharePoint:AspMenu>
The change you are talking about would relate to the
MaximumDynamicDisplayLevels property.

If the master  has not been modified, then perhaps something has changed in
the top level navigation of your portal. In order for the flyouts to work
as you have outlined, ensure that navigation is setup correctly. Go to Site
Actions> site  Setting>Modifiy All Site Settings>Look and Feel> Navigation.
Upon this page ensure that under current  Navigation that "Display the
current site, the naviation items below the current site and the site's
siblings" is selected.

Does the Master Page show a little blue icon with the letter 'i' in SharePoint
Designer? Right-click the Master Page and select Reset to Site Definition.

I will have to check this out. I didn't know it could be reset

If the default.master was edited using SharePoint then you will see the blue
icon described when you look at the file stored in _catalogs/masterpages in
SharePoint Designer . It can then be reset  using SharePoint Designer.

If the file was edited directly from the 12 hive using any other editor, then
you will need to restore  a clean copy of the file from a backup or other
install.

You can restore  your WebApplication .
But you have to have the master.page copy at all the time.

Well, as a last resort, you can reset  the site  to the site definition.
Otherwise, install sharepoint  on a clean vm or something and grab the default
master from that instance and copy it over

I fear that he may have done something bad.
Any new sites  do not show up on the menu. You can manually browse to them.
When you select site  Settings > Site master  Page Settings you get the following
message:
The site master page setting currently applied to this site is invalid. Please
select a new master page and apply it
The system master page setting currently applied to this site is invalid.
Please select a new master page and apply it.