If you have done masking effect in PowerPoint 2003, or have seen the blog post on Mask with PowerPoint (See Figure 1 and 3), then you should take a look at the blur effects offered by PowerPoint 2007 and 2010. The introduction of blur effects allow you to insert a shape of your preference (e.g. circle or donut), then add the blur effect making the masking more realistic and stylistic. To add the blur effect, simply double click the added shape, then click on the Insert tab > Shape Effects > Soft Edges > (Extent of the blur effect. Preferably 10 to 25 points).
Above is a screenshot of how the masking in combination with the blur effect (or soft edge) will look like in PowerPoint 2007 and 2010. The blur effects offered by both versions are equally great. That being said, PowerPoint 2010 is a still great improvement over its predecessor. And what makes it stand out more is the amount of flexibility. In PowerPoint 2010, you are given complete control over the blur effects setting. To do so, right click on the shape, select Format Shape > Glow and Soft Edges. Under Soft Edges section, you are given a slider bar to set the soft edge of your preference from size range 0 to 100, as compared to 2007, which restricts you to only 6 increment options in the range of 1 to 50.