Your Web site is simply a means of providing access to information. As such, the single most important aspect of any site is its navigation. Bad navigation leaves the user confused, stranded, and frustrated. And in the long run that leaves your site with less repeat traffic.
For an overview
The first step in designing a navigation system that works is deciding where on the page to place it. For a long time, it was an unwritten rule of site design that navigation lived in the left-hand column. Then, with the emergence of more sophisticated design tools such as Cascading Style Sheets, some sites used the header for navigation. Doing so freed up space in the body of the home page for content and led to a new wave in site design.
These days, you're as likely to see one as the other and, in many cases, both. How you decide to implement your navigation should be a compromise between design and content, but always remember that organization is a by-product of the content and scope of your site. If you want to employ both vertical and horizontal navigation, a good rule of thumb is to place the elements that will persist from page to page in the horizontal band across the top of the page, and put subnavigation topics in the left-hand column.
Drop-down menus can keep your navigation bar from seeming cluttered while providing more options. Drop-down menus should never go deeper than three levels. If you need more navigation after that point, provide it on the relevant landing pages.
Here are some basic rules for creating a usable navigation scheme:
Your site's navigation should make the most important content clearly accessible from the home page. As users drill down into the site, the navigation should remain relevant, and the user should always have backward access to top-level pages.
Also read Effective Navigation Design for Web Sites for some good advice.