You need to slideDown the same elements you hide.
http://jsfiddle.net/isherwood/nrFhu/7/
$(this).find('.sidebar-inner-list').slideDown();
Should be
$(this).find('.sidebar-inner-list li').slideDown();
To solve the up-down issue, you'll probably need to add one more logic layer:
http://jsfiddle.net/isherwood/nrFhu/8/
$('.sidebar-navigation > li').each(function () {
$(this).click(function () {
$('.sidebar-navigation > li').not(this).find('li').slideUp();
$(this).find('.sidebar-inner-list li').slideDown();
return false;
});
});