Every year when I make invitations for my kids' birthday parties, I have to re-teach myself how to make a circle or an oval crop of their sweet faces, and this year it's going in the blog for posterity!
First, open your photo in Photoshop. Using the Elliptical Marquee Tool, draw the circle/oval over the area you want to keep. Holding down the shift key while doing so will give you a perfect circle. Next, choose Select -> Inverse. Use the Magic Eraser to erase what you can of the background, then use the regular eraser tool (in a large size) to erase the rest. Because only the inverse is selected, the area within the circle/oval will not be erased even if you go over it with the eraser. Now choose Select -> Deselect, and voila! Now you can crop the image closer to the circle/oval and save it for later use ;)