This is due to an error in the way the file (whatever it is, png, ico, etc) is converted into an icns file, the type used by macs. Using this method, even taking an image from an icns file will cause problems with coverflow. This is because icns files hold 5 images, all different sizes. Our culprit is the largest file, 512x512, which for some reason is never created when copied and pasted from preview or some other image viewing software. Some apps you can download solve this, but here's my free method which also gives you some nice customization options.
1. find an image you want as an icon.
2. convert this to an icns file. I used Icon Composer, it's a free app from Apple's Developer kit, an optional install off the OS disk. There may be other apps, but this one's a simple drag and drop, so may as well use it. you may have to do some resizing before you drag the image in to get what you want.
3. Now you have an icns file with all five images represented... but opening it in preview and copying it won't work, and sadly, as the icon for this file will be a generic "icns" image, neither will the Get Info -> copy method. Now we need a sweet little 600k app called IconDroplet. Just drag the icns file onto this app and it will create an "application" next to your icns file that does essentially nothing, but has the icns file as its icon!
4. At last, you can go to Get Info for this fake app, copy the icon the the upper left corner, and paste it onto the icon in the Get Info box of your desired folder or file. Test out coverflow - everything should be dandy.
Icon Composer is nice because it allows you to use different images for different size icons. As details are lost when an icon is shrunk down, developers often create simpler icons that are easy to distinguish at a size like 16x16 pixels (List View or favicon size). Try dragging in different images for the different sizes in Icon Composer, load the icon on to a file using the method above, then view the icon in coverflow. When you change the sie of the window, you will see our icon magically transform right before your eyes, as it is switching between higher- and lower-res files!
hope this helped, and I hope others find this and can avoid the frustration I experienced!
- Austin