The context menu can be modified using the same APIs as the regular menus (same names but on the ActiveContextMenu object, and you should do it inside the On_Context_Menu event).
If you add a menu item to the context menu you can then add a menu item to that item (treat what you just added as an object), and as soon as you do so the first one becomes a sub-menu, with the second item(s) inside it.
The documentation doesn't have any good examples for doing this, but this demo script contains an example:
http://forums.xmetal.com/index.php/topic,738.0.html