Well, a Firefox extension, be it a sidebar, toolbar or whatever other type of extension is basically a mix of XUL and Javascript, all packaged nice and tidy into an installer package called an XPI.
For an excelent XUL tutorial see http://xulplanet.mozdev.org/tutorials/xultu/.
For information about building extensions and the package format see https://developer.mozilla.org/en/Building_an_Extension.
For a sidebar you basically have to override the browser's sidebar area by using an overlay. For good overlay information check out MDC and the excerpt at http://www.oreillynet.com/pub/a/mozilla/excerpt/FirefoxHacks_chap01/.
All you need except the links above is knowledge of XML, some Javascript and a creative mind.
To fix the problem you faced above, you have to specify the correct version of Firefox in the install.rdf file. For Firefox 3 set maxVersion to:
<em:maxVersion>3.*</em:maxVersion>