A Windows icon contains 1 or more images, at different resolutions and color depths. When Windows wants to display the icon, it searches through the images to find the one the best matches the number of colors and resolution of the display.
Microsoft recommends including at least the following formats in each icon.
16 x 16 - 4 bpp
32 x 32 - 4 bpp
48 x 48 - 8 bpp
The and mask is like an alpha mask, except for what it signifies in the "not opaque" areas. In the usual case, the foreground image is black in those areas, and in that case the areas are fully transparent -- the background shows through the icon. But in general, a not opaque pixel signifies that the background and foreground should be merged as follows: The intensities of the color components in the forgeground and background are represented as binary numbers, then corresponding bits of the background and foreground intensities are exlusive-or'ed together. So there is a sort of reverse video effect.