This is actually not that hard. Get the ICO file you want to use and COPY IT (Cmd-C). Next go to the folder and do a GET INFO on it (CMD-I). Highlight the icon at the TOP of the Get info window. You should see that it's selected. Hit PASTE (Cmd-V) and Viola! It changes.
Note that some icons don't have small enuff images in them and when you add them to the sidebar in Panther, they show the original icon.
Now to change back... Open the Get Info Window again and select the icon and hit CUT (Cmd-X) and it will go back to the original icon.
I Hope that helps.
macboyX