The file might be good, but your Finder does't know which app it belongs to, so defaults to the closest assosciation--LW in this case. As with any document with a generic icon, you can drag it onto the app you think should be able to open the file (Disk Copy in this case).

In OS 9 and earlier, the icon of the file is set (mapped) by the Finder in the invisible Desktop DB fie. Many utilities will rebuild the Desktop DB file (Norton, Tech Tool), or it can be rebuilt by holding down command and option just before the disk loads on the desktop. You can also see and set the mappings in the File Exchange Control Panel.

However, the Finder can only map files to the appropriate application if you had it loaded once.

.dmg files are created by OSX's Disk Copy (or Disk Utility in Panther), but sometimes the OS9 Disk Utility can mount them.

Cheers (yeah--another reason to go with OSX: it's been a year and a half for me, and I don't think I could go back)