Can someone please explain the concept of masking ( as it relates to image list creation) to me?

This is a very broad concept used everywhere in programming. You probably need to ask more specific question.
Explain what do you want to achieve...
—SA

With 32bit images, you have 8bits each for Red, Green, Blue & Alpha.
With masking, you use an image without alpha information. You use the first image to provide the colour information and the second to provide (1bit - i.e transparent or opaque) alpha information.

ImageLists are used by some of the native win32 controls. Examples include the tree-view and list-view controls. If you provide an image without a mask or an alpha channel, all colour information is displayed, resulting in a square/rectangular picture. By using a mask, you could display a circular potion of an icon, by masking-off the corners.