Open your picture in Photoshop and edit it the way you want it to appear. (I changed the color of this image with Harald Heim's fantastic B/W Styler plug-in for Photoshop. I found the baby's pores were a little too obvious in the sharp shot and use Harald's FocalBlade plug-in with the Soft-Focus setting to soften the look.)
Then go to Layer>Smart Object>Convert to Smart Object.
Edit>Transform>Scale. Hold Shift key while you drag one corner to make the pasted image smaller. Use the move key to put the image where you want it. Turn off that layer view by clicking on the eyeball at the left of the layer in the layers palette.
Click on the Background Layer to make it the active layer and Click on New Layer Icon.
Click on the new blank layer to make it active. (It should be in between the background and the pasted image.)
Make white your foreground color and click on the Fill Tool.
Click on picture to fill middle blank layer with white.
On layer palette go to Fill setting at top and slide it to the left till you like that way the white transparency looks.
Make the top layer active and use the Magic Wand to select the blank area and invert the selection.
Edit>Stroke>Inside 2 pixels (white)
Layer>Layer Styles>Drop Shadow. Move the size slider and adjust other settings to get a drop shadow you like.
Add text if desired.