Does anyone have an example of how to do some masking with Delphi TImage so I can have one image put on another?
Look at http://graphics32.org/ it can be a good start.
You can use the Copymode (cmSrcErase,cmSrcCopy,cmSrcAnd,cmSrcInvert) property of the Timage.Canvas, you can find a basic example in this link.
A good location to have for delphi graphics is efg's Computer Lab. Specifically to your question, there is a project Cursor Overlay which starts with cursors, but the concept is there to do what you are asking.