Getting X/Y of mouse ONLY inside rendered area

The .NET Panel class has a method named PointToClient that accepts a Point as input. The Point should be in screen coordinates (in your case; the mouse cursor position relative to the screen itself), the result is a Point that is relative to the Panel.

You could use something like the following where you create some functions for your mouse inthe panel, then in your logic code you react to it:

private void panel_MouseLeave(object sender, EventArgs e)
{
trackMouse = false;
}

private void panel_MouseEnter(object sender, EventArgs e)
{
trackMouse = true;
}

if (trackMouse)
{
if (frameCount == 0)
{
if (mouse.X < Engine.TileWidth)
position.X -= Engine.TileWidth;

if (mouse.X > mapDisplay.Width - Engine.TileWidth)
position.X += Engine.TileWidth;

if (mouse.Y < Engine.TileHeight)
position.Y -= Engine.TileHeight;

if (mouse.Y > mapDisplay.Height - Engine.TileHeight)
position.Y += Engine.TileHeight;

camera.Position = position;
camera.LockCamera();
}

position.X = mouse.X + camera.Position.X;
position.Y = mouse.Y + camera.Position.Y;

Point tile = Engine.VectorToCell(position);
shadowPosition = new Vector2(tile.X, tile.Y);

tbMapLocation.Text =
"( " + tile.X.ToString() + ", " + tile.Y.ToString() + " )";

if (isMouseDown)
{
if (rbDraw.Checked)
{
SetTiles(tile, (int)nudCurrentTile.Value, lbTileset.SelectedIndex);
}

if (rbErase.Checked)
{
SetTiles(tile, -1, -1);
}
}
}?

Let's say your draw region is 100x100, and positioned from the topleft corner at 256x256. To get the mouse position in the box, you would just subtract the measure of the top-left corner from the mouse XY position to get a relative value. Then, you can use simple checks ( if newX < 0 || newX > 100, then mouse.X is not in the box's x bounds and therefore cannot be in the box, else check newY etc. etc.). That's all there is to it! Really. That's all.

You might achieve this by creating your directinput object with the "discl_foreground" parameter (instead of background). Assuming i understand your question correct.

Simply grab the MouseMove event of said Panel ?