How to put round cornered frame around an image

As Martin mentioned in the comment and I think mdframed is to break a butterfly on a wheel, I want to present a tikz-Solution:

\documentclass{article} 
\usepackage{tikz}
\usepackage{xparse}
\newsavebox\MyPicture
%\roundedpicture[graphcis-setup][tikz-setup]{graphics path}
\NewDocumentCommand{\roundedpicture}%
      {O{width=0.6\linewidth}
       O{draw=blue,line width=6pt,rounded corners=5pt}
       m}{%
   \savebox\MyPicture{\includegraphics[#1]{#3}}%
   \begin{tikzpicture}%
    \draw [path picture={%
                   \node at (path picture bounding box.center) {%
                       \usebox\MyPicture};},#2]
          (0,0)  rectangle (\wd\MyPicture,\ht\MyPicture);
   \end{tikzpicture}%
}
\begin{document}
\roundedpicture[width=5cm]{donald-duck}

\roundedpicture{donald-duck}
\end{document}

---

ORIGINAL POST uses mdframed

You can change the behavior of the background. By default it is drawn as a filled rectangle.

With the following code you put a dummy in the environment to get the picture in the foreground.

\documentclass{report}
\usepackage{lipsum}
\usepackage[framemethod=TikZ]{mdframed}
\mdfdefinestyle{short}{roundcorner=5pt, leftmargin=2cm,innertopmargin=0pt,innerbottommargin=0pt, innerleftmargin=0pt,innerrightmargin=0pt, innerlinewidth=0pt, middlelinewidth=0pt,outerlinewidth=10pt, outerlinecolor=red}


\usetikzlibrary{backgrounds}
\makeatletter
\newrobustcmd\addtikzsetting[1]{%
   \appto\md@tikz@settings{#1}%
}

\addtikzsetting{%
   \tikzset{mdfbackground/.style={path picture={
                     \node at (path picture bounding box.center) {%
                       \includegraphics[height=5cm,width=5cm]{donald-duck}
             };}}}}
\makeatother
\begin{document}
\begin{mdframed}[style=short,]
\hsize=5cm\rule{0pt}{5cm}
\end{mdframed}
\end{document}

_{I think mdframed isn't the correct environment. You should create you own environment via tikz.}

Now the modification with a new command so that it can be centered or whatever you want.

\documentclass{report}
\usepackage{graphicx}
\usepackage{lipsum}
\usepackage[framemethod=TikZ]{mdframed}
\mdfdefinestyle{short}{roundcorner=10pt,innertopmargin=0pt,innerbottommargin=0pt, innerleftmargin=0pt,innerrightmargin=0pt, innerlinewidth=0pt, middlelinewidth=0pt,middlelinewidth=10pt, middlelinecolor=red,leftmargin=0pt,rightmargin=0pt}


\usepackage{xparse}
\makeatletter
\newsavebox\MyPicture
%\roundedpicture[mdframed-setup][graphic-setup]{graphics-name}
\NewDocumentCommand{\roundedpicture}{o o m}{%
  \savebox\MyPicture{\includegraphics[#2]{#3}}%
  \begin{minipage}{\dimexpr\wd\MyPicture+20pt\relax}
  \appto\md@tikz@settings{%
     \tikzset{mdfbackground/.style={path picture={%
         \node at (path picture bounding box.center) {\includegraphics[#2]{#3}};}%
          }%
      }%
   }%
  \begin{mdframed}[style=short,#1,nobreak]
    \hsize=\dimexpr\wd\MyPicture\relax%
     \rule{0pt}{\dimexpr\ht\MyPicture+\dp\MyPicture\relax}
      \rule{\dimexpr\wd\MyPicture\relax}{0pt}
   \end{mdframed}%
   \end{minipage}
}
\makeatother

\begin{document}
 \begin{center}
\roundedpicture[][width=3cm,height=5cm,keepaspectratio]{donald-duck}
\end{center}
\end{document}

Run with xelatex

\documentclass{article} 
\usepackage{pstricks,graphicx}
\newsavebox\IBox

\begin{document}    
\leavevmode
\savebox\IBox{\includegraphics{/tmp/donald}}
\put(0,0){\usebox\IBox}%
\psframe[framearc=0.2,framesep=0pt, cornersize=relative,
  linecolor=blue,linewidth=3mm](\wd\IBox,\ht\IBox)
\end{document}

and the same with clipping theimage:

\savebox\IBox{\includegraphics{/tmp/donald.png}}
\begin{pspicture}(\wd\IBox,\ht\IBox)
\psclip{\psframe[framearc=0.7,linestyle=none](\wd\IBox,\ht\IBox)}
\rput[lb](0,0){\usebox\IBox}%
\endpsclip
\psframe[framearc=0.7,framesep=0pt, cornersize=relative,
  linecolor=blue,linewidth=4mm](\wd\IBox,\ht\IBox)
\end{pspicture}