Add an item
Just follow the same procedure you would to add an item to the Dock.  Simply drag the item from it's location to the Sidebar.  As you do this you will see a blue horizontal bar appear indicating the location where you are placing it in the sidebar.

In the example below, the Pictures folder will be placed below the Documents folder shortcut.  Now you can easily access your Pictures folder no matter where you have navigated to within are in Finder, just click on it in the Sidebar.

Ensure that you see the blue horizontal line when you are placing an item in the Sidebar.  If you see that an existing item becomes highlighted with a blue box, the item you intend to add to Sidebar will instead get added to the shortcut.  In the image below, an image called test_image will be added to the Picture folder by simply placing it on top of the Pictures folder.  If you place the image over the folder and hold for a while, Finder will automatically place a darker blue box around the item (just after a cool blink effect) and then switch to the folder as shown in the second image.  Once you release, the item will be placed in the folder.

Remove an item
One way to remove an item is to drag it out of the Sidebar.  Once you release as you drag, the item will disappear with a puff of smoke just as items removed from the Dock.  As is the case with removing icons from the Dock, you have only removed it from the Sidebar and have not deleted it.  Keep in mind that you are removing a shortcut and not the actual item such as the Pictures folder.

An alternate remove method is to right click (or control click) on the item and select 'Remove from Sidebar'

Updates

• May 28, 2009 - content revision, image updates