Edit: this technique also works if you choose to place a circular (or any other shape)mini-movie outside of the base
Open up Paint Shop, and if your layer window isn't open already, open it because I find it easier to work with. If you can't find it, here's the directory. Goto View>Palettes>Layers
Now open the base image you would like to work with. I chose this image:
Create a new raster layer on top of it, and flood fill with the gold pattern.
On your layer window, right click on the new layer, and goto "Properties". For the blend mode, I chose Color(Legacy).
We can merge the layers at this point, unless you would like to make more changes. Now I would like to smooth the image, so that it doesn't look so pixy. To do this, go to Enhance Photo>Edge Preserving Smooth, and set the amount of smoothness.
If you want a 100x100 icon at the end, then crop it to a square. We are done with base. If you would like to modify it more, then you may do so. Note: don't resize it to icon size until you are ready for the animation because it will be easier to work with at the original size.
If you have not made screen caps of the clip you want, do that now. Next, open all the frames in Paint Shop (yes Paint Shop, not Animation Shop, yet). What we need to do now is convert the first frame of the clip to a raster layer. We can do this by right-clicking on the layer in the layer window, and left click on Promote Background Layer. Now add a new group layer on top of the promoted layer by clicking on this button on the layer window.
Now select the first raster layer, copy the second frame and paste it as a new layer (make sure it's under the group layer). Repeat this until you have copied and pasted all the frames. Next select the group layer, then crop on that layer (anything you change on the group layer changes all the layers within that group). Still on the group layer, select the region you want as the mini-movie. I used the circle selection, and feather at 30 because I want the movie to blend onto the base. Now copy one of the layers and test it out on the base. If you need to resize it, select the group layer again, and resize like you would normally do. I'd like a fade in effect on my movie, so I change the opacity of the first 4 frames. This is what I did. (one more notice, make sure you do not deselect at any point)
Edit: I didn't get it to work, so play around with PSP8 yourself if you would like this effect
Now we are ready to proceed to Animation Shop.
Now select the first raster layer, and copy it with the selection still selected. Paste it to Animation Shop as a new animation (Ctrl>V). Next select the second layer, copy it and paste it behind the selected frame (Ctrl>Shift>L). Repeat this process until you have copied and pasted all the frames. Now copy your base, and paste it to Animation Shop as a new animation. Duplicate it by right clicking on the frame, and select Duplicate Selected.
Keep duplicating until you have the same number of frames of the base as the movie. Now select all the base frames and movie frames. Making sure you are starting with the first frame on both, drag the movie frame onto the base frame. You can test the animation with this button.
If the animation is too fast or too slow, you can change the time interval by going to Frame Properties.
Now it's time to resize the animation to icon size. Follow the image above, but select Resize Animation this time. Once selected, check the Pixel Size and adjust the numbers. Also have the Maintain Aspect Ratio checkbox selected.
Now save the animation. For my icon, level 4 optimize works well. And here's the finished product.
Quick question, would anyone like me to write a tutorial on producing an icon like this ?