The answer I learned growing up was that "we don't want to embarrass the bread because we are first making kiddush" or some variation thereof. I later learned that is a zecher for the ma'n which fell with a coating on top and bottom. Where does that first answer come from? And, if it is a legitimate source, what does it really mean (ie bread doesn't have feelings!)?
The Tur (OC 271) here brings three reasons why we cover the challah.
Some practical differences emerge from this discussion.