here are the basic steps for it
go into your photo section and find the picture you want as a wallpaper
tap "set as wallpaper" (tapping that WILL NOT set it)
then you move/zoom/crop then picture until it is just right
then tap the bottom left corner which says "set wallpaper"
you will see the iphone loading
then it is set, but will only be seen on the unlock screen
when the iphone is docked it uses the charging screen instead of the unlock screen so you won't see your wallpaper there either =/
hope that helps you out