Here's a way I guess you could do it; I'm sure there are other easier ways, but I was just playing around. I don't feel like uploading pics so hopefully words are good enough:
1) Open up your image.
2) Create a new layer, and click on Elliptical Marquee Tool; now, while holding SHIFT (to make it a perfect circle), make a circle around the area that you want for the whole label (making it the same length as a CD; about a diameter of 4.5 inches or so - if your ruler isn't open you can go to View and then Ruler to open it up). Also place a stroke (Edit, Stroke, and a 1pixel stroke Inside) on the image just so you can have an actual layer and not just a selection.
3) While you still have the circle selection, go to Select and click on Inverse. This will highlight everything outside your circle. Now go to your layer that has the image on it, and press delete. This will just make it so only the image inside the circle you made is left.
4) Now go to the layer you made that I earlier told you to give it a stroke, in step 2. Press CTRL+J to copy the layer, and press CTRL+T to open Transform mode. At the top you'll see an area for "W" and "H" (Width and Height). Change these and make them smaller, making sure they stay the same number (such as W=30%, H=30%); I am not sure but the smaller circle should probably have a diameter around 1.5 inches or so.
5) After you have this, select the Paint Bucket tool, change the color to white, and with that smaller circle layer highlighted click inside the circle. This will pretty much finish this up, and if you want you can put a 1pixel black stroke on the inside of the smaller circle.
The hardest part of this may be getting the sizes right for it to fit on a CD, so you may have to play around with it some to get it. Below is a picture of something that kind of looks like a finished product; the only problem with it is I didn't actually size it up right, so I think it's much smaller than would fit on a CD and such, but it gives kind of an example. After you print it out, I guess you'd just cut away and find a way to attach it, although I know there are the CD labels out there that would make the job a lot easier. Good luck
