- Make a new layer on top of the background, then make a circular selection (hold down shift to make sure it is a perfect circle) and fill it with any color that you want.
- Set the fill % in the layers palette to 0%.
- Go into the layer FX and add a stroke (black) and inner glow (white).
- Keeping the circle selected, move to the background layer and hit ctrl+c (copy).
- Make a new layer above the background but below the magnifying glass, paste the copied part, line it up pretty well, hit ctrl+t (free transform) then scale it while pressing both shift (to keep it proportional) and alt (to keep the center stationary).
- Ctrl+click the magnifying glass layer's icon in the layer palette (the one you made in step 1, stroked in step 3, etc.) and then hit Ctrl+Shift+i to invert the selection.
- With the zoomed content layer selected (from step 5,) hit delete.
- Bring up the FX for the zoomed content layer and put a fuzzy drop shadow on it.
After that, make a handle for the magnifying glass... probably the easiest way would be to create a new layer, make a tall, narrow selection, fill it with black, and then use liquefy on it. The more difficult (but better results) way would be to make a new layer, use the pen tool to create a path with a subtle wavy top, then go into the paths palette, right-click the path, select "Make Selection," and then use Edit-Stroke. Delete the left, right, and bottom sides, keeping only the top. Then position it so that it is flush with the stroke from the magnifying glass layer (the one with the stroke and inner glow on it.)
Here's an example:
You could also use spherize on the zoomed content, but it's going to heavily distort the text: