In 1.2 we have introduced the ability to encode video ringtones formatted specifically for the iPhone. Video ringtones are NOT a feature that is directly supported by Apple and requires a "pwned" iPhone. More information on the pwnage process can be found at the iPhone dev teams website (go to software | official torrents for downloads, it will redirect to the pirate bay but it is perfectly legal, warning: there may be explicit ad content on pirate bay) If you are not familiar with bittorrent, we recommend the free client Tomato Torrent
For the less experienced user we recommend grabbing the QuickPwn application rather than the PwnageTool, this link at hackint0sh will help for any potential problems with DFU and iTunes in 10.5.6. The "pwned" iPhone requires OpenSSH/SSL installed in addition to vWallpaper / SkrewCommon installed. More information about vRingtones, SkrewCommon and vWallpaper can be found here
if you already have a pwned iPhone with the above requisites taken care of, go into preferences > importing and then click the button next to iPhone address, make sure your iPhone isn't locked / asleep. A list will appear with local clients that have ssh enabled, choose your iPhone on this list and it will save the network address as the default in your importing preferences.
From there select the desired output file in your main table view window and set the start and stop times desired (either during playback with [ and ] or manually set the start and stop time text fields).
In the advanced menu choose "Prepare for video ringtone", the selected file should encode and copy into the proper location on the iPhone for use with vWallpaper / vRingtones (specifically to the ringtone section within vWallpaper)
NOTE: there is no app actually called vRingtone, it is located within vWallpaper and SkrewCommon, all things necessary for an pwned phone can be installed from Cydia.
On the iPhone side:
go into vWallpaper - > Video Ringtones and set Enable VideoRingtone to On.
From here you can choose a global video that will be your default video ringtone. You can also set custom ringtones for different contacts (manage contacts) as well if desired.