This was an interesting experiment. First, realize that what you're looking at is a pure [digital] photograph. The only digital alterations made is some cropping of the image and adjustment of white balance and the image's tone curve. The circles were not added later, multiple images were not layered and no layer or filter effects have been applied. You're seeing water over smoke over the background. The background is a red photo box lid (with no photo hence the black center) that is secured to a large piece of black foamboard using magnets. Cone incense is lit in front of the lid and I'm spraying water just in front of the camera using a little squirt bottle.
There are two SB900 flashes, one is bouncing off the interior of a shoebox off to the left pointing at the lid & smoke, the other is off to the right pointing towards the camera (sole purpose is to illuminate the water drops). Both are at approximately 1/64 power.
The Lumix GF1 camera is set to 45mm, with the focus set to manual and focused on the smoke. I opted to not use automatic focus for fear that the camera might attempt to 'lock on' to the water I was spraying. Even though the camera is clearly not focused on the plane that the water is in, the circles will appear to the eye to be perfectly focused and have a very defined boundary. The aperture is set to 1/5.6 (the largest opening when zoomed all the way in) and shutter speed was set to 1/160 (when using an eternal shoemount/remote-flash, the camera won't go any faster than that). It's important to use the largest aperture setting to each this type of effect since it's the only way you'll get perfect circles (instead of shapes that look more like stop signs) Oh yeah, it's worth mentioning that I'm not using an on-camera Flash, but instead using a Pocket Wizard to trigger one of the SB900's and the other SB900 is set up as an SU-4 remote so it's triggered as soon as it sees the light from the first flash).
Using a lower power on the flashes is critical for this effect as otherwise, the camera will see the water drops for too long of a duration, and it will result in a smearing of the circles.
Also the room was moderately lit. The image would probably be a slight bit crisper if the room could be completely dark as the largest aperture setting is being used. Oh, and the box/foamboard is approximately 5 feet from the camera.