If you want to go for full blown feathering you should consider taking a look at this article:
http://danbystrom.se/2008/08/24/soft-edged-images-in-gdi/
If you want a quick and easy solution you could probably draw the image first then draw a GraphicsPath on top of it using a solid white brush with antialiasing. You would do something like this:
Rectangle outerRect = ClientRectangle;
Rectangle rect = Rectangle.Inflate(outerRect, -20, -20);
using (Image img = new Bitmap("test.jpg"))
{
g.DrawImage(img, outerRect);
using (SolidBrush brush = new SolidBrush(Color.White))
using (GraphicsPath path = new GraphicsPath())
{
g.SmoothingMode = SmoothingMode.AntiAlias;
path.AddEllipse(rect);
path.AddRectangle(outerRect);
g.FillPath(brush, path);
}
}