How do I crop in a circle?

Okay, first of all you have to understand that all digital images, every single one, are always rectangular or square. But you can make an image appear to be any shape by using transparency and then saving it in a format that respects transparency. So:

1. Go over to the layers panel and double click your background layer to turn it to a regular layer. Say ok to the dialog box that appears.

2. Go to the marquee tool (the dotted rectangle) and click hold on it for a popout menu. Choose the elliptical marquee tool.

3. Use it to drag a circle in your image. Holding down the shift key while you drag will constrain it to creating a circle instead of an ellipse.

4. After you have your selection, go to Select>Invert, then press backspace/delete to get rid of the area outside the circle. (If you need a softer edge, you can add a one or two pixel feather (select>feather) before deleting.)

5. Save in a format like Tiff, psd, gif (Not jpg).

There are many ways to crop. Here is one which offers lots of flexibility. No doubt other readers of this forum will offer other suggestions.

Your picture when loaded into PSE has the default layer named "Background". First thing is to convert it to regular layer by renaming it; double-click it and enter the new name or simply accept the default name "Layer 0".

Next, active the Elipse tool.  Holding down Shift, draw out a circle approximately the size you want (Shift forces the ellipse to be a circle). This creates a new layer named "Shape 1". Don't worry that the circle is a solid color and not in the exact size and position you want; we will fix this is a moment.

Move the shape layer below the picture layer and group the 2 layers.The picture will now be cropped into the circle, with a checkerboard background indicating transparency:

The nice thing about this method is that you can now resize and reposition the picture precisely where you want it within the crcle.  Select the Move Tool and with either layer activated use the mouse and/or arrow keys to reposition the picture. To resize the circle, with the Move tool selected activate the picture layer and while holding Shift drag any of the corner handles to resize (Shift preserves the circle). If you want to reposition the circle-picture combination within the picture's canvas, link the 2 layers and use the Move tool with mouse or arrow keys.

If the picture is to be used for an application that requires transparency (such as MS Word document, Web page, greeting card program), save it in a file type that supports transparency. PSD, TIFF, PNG, GIF, EPS support transparency.  JPG, BMP do not. If you save it as jpg for example, you will not have transparency but instead a white background (which is maybe what you wanted in the first place). If you want a different color background add a blank layer at the bottom of the stack and fill it with your color:

Like I said, there are other (and easier) ways to crop but this offers the flexibility of resizing and positioning.

I made some minor changes to explain the purpose of the Shift key.

Yes, you could also use a layer mask in PSE 9, in pretty much the same way: make the elliptical selection on the photo layer, then click the layer mask button at the bottom of the panel. This will be editable, too, without all the grouping.