I think this is quite a known method, but just in case it might be useful to someone...:-)
To get a nice picture frame, if no miniature shop is nearby, simply go to the nearest haberdashery shop or browse through your stash; chances are you'll find some buttons which are made of two parts like those in the picture above. Pop the middle insertion out. Usually it goes smoothly, but in case it doesn't, press it against some hard surface and it will. And voila! A space for a picture!
Make a template. I do it by pressing a piece of paper against the oval/circle and going around the edges with my fingers so it forms a relief - I guess there might be better ways of doing this, but it's just how I do it.
Use the template to trace the outline on your chosen picture and cut out a piece of plastic sheet (for example from discarded food packaging or other such), glue it together and that's it, you're done:-)