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Since iOS 4, Apple has also integrated the option of making video calls. The corresponding application is called FaceTime. Both you and the person you are talking to have to fulfill three requirements. Both of you need to have iOS 4 or 5 installed and be using an iPhone 4 or newer. And both devices need to be connected to a WLAN.
Before the first FaceTime call can be connected, you need to start the call as a normal phone call. So, dial the number of the person you want to FaceTime call. Provided that all requirements are fulfilled, you will see a FaceTime button on the iPhone screen in the place where the Hold/Mute button was before.
If both iPhones fulfill the requirements for FaceTime, the FaceTime button appears.