There are a couple of ways to do that, depending on your Layers.
Basically, create you ~ 25 - 43mm (depends on the hub design of your disc) Circle (Elliptical Marquee Tool, constrained to Center & Circle with the Alt & Shift keys - I would also do perpendicular Guides for the exact center of the Image). You now have your Circular Selection. Hit Ctrl+Shift+I to Invert that Selection. Here, I would Save Selection. Then, with that Inverted Selection active, create a Layer Mask. If you have Layers stacked in that area, just repeat the process for each. That is why we Saved that Selection, though you could get it back with other techniques. Before you do that, you might ask yourself about those other Layers. Personally, I would first Save that Layered PSD, then Flatten, so you only "punch" one hole, but that is your choice.
For the outter knockout, just repeat the process, but with a larger Circle. Note: many printers do not require that outer circles, as they will limit the ink coverage to just the DVD/CD, but I like to clean things up, as few DVD's/CD's allow printing to 100% of the diameter, and there is no sense possibly spreading some ink on the tiny area outside of the printable surface. It just depends on your printer, and its driver.
Bill Hunt? Are you still out there sitting poolside working and still finding time to answer virtually every post in all the Adobe forums? I guess so!
Thanks for weighing in on this one. It actually wasn't for a label, but an online ad. I ended up using an Ai template for labels I found while waiting for an answer.
I still think by this time there should be an easier way to do this, like make a circle with the elliptical tool and press delete...or some such thing.
AZ should be pretty nice at this time of year--in that dry heat.. Enjoy.