You must create two bitmaps, a mask bitmap (called the "AND" bitmap) and a image bitmap (called the XOR bitmap). You can pass the handles to the "AND" and "XOR" bitmaps to the Windows API function CreateIconIndirect() and use the returned icon handle in your application. Example:

procedure TForm .Button Click(Sender: TObject);
var
  IconSizeX : integer;
  IconSizeY : integer;
  AndMask : TBitmap;
  XOrMask : TBitmap;
  IconInfo : TIconInfo;
  Icon : TIcon;
begin
 {Get the icon size}
  IconSizeX := GetSystemMetrics(SM_CXICON);
  IconSizeY := GetSystemMetrics(SM_CYICON);
 {Create the "And" mask}
  AndMask := TBitmap.Create;
  AndMask.Monochrome := true;
  AndMask.Width := IconSizeX;
  AndMask.Height := IconSizeY;
 {Draw on the "And" mask}
  AndMask.Canvas.Brush.Color := clWhite;
  AndMask.Canvas.FillRect(Rect(0, 0, IconSizeX, IconSizeY));
  AndMask.Canvas.Brush.Color := clBlack;
  AndMask.Canvas.Ellipse(4, 4, IconSizeX - 4, IconSizeY - 4);
 {Draw as a test}
  Form .Canvas.Draw(IconSizeX * 2, IconSizeY, AndMask);
 {Create the "XOr" mask}
  XOrMask := TBitmap.Create;
  XOrMask.Width := IconSizeX;
  XOrMask.Height := IconSizeY;
 {Draw on the "XOr" mask}
  XOrMask.Canvas.Brush.Color := ClBlack;
  XOrMask.Canvas.FillRect(Rect(0, 0, IconSizeX, IconSizeY));
  XOrMask.Canvas.Pen.Color := clRed;
  XOrMask.Canvas.Brush.Color := clRed;
  XOrMask.Canvas.Ellipse(4, 4, IconSizeX - 4, IconSizeY - 4);
 {Draw as a test}
  Form .Canvas.Draw(IconSizeX * 4, IconSizeY, XOrMask);
 {Create a icon}
  Icon := TIcon.Create;
  IconInfo.fIcon := true;
  IconInfo.xHotspot := 0;
  IconInfo.yHotspot := 0;
  IconInfo.hbmMask := AndMask.Handle;
  IconInfo.hbmColor := XOrMask.Handle;
  Icon.Handle := CreateIconIndirect(IconInfo);
 {Destroy the temporary bitmaps}
  AndMask.Free;
  XOrMask.Free;
 {Draw as a test}
  Form .Canvas.Draw(IconSizeX * 6, IconSizeY, Icon);
 {Assign the application icon}
  Application.Icon := Icon;
 {Force a repaint}
  InvalidateRect(Application.Handle, nil, true);
 {Free the icon}
  Icon.Free;
end;