You can create a ringtone in iTunes. But that only works with a small subset of the songs in the iTunes Store -- and will cost you 99 cents a pop. Alternatively, you can create a ringtone for free from any unprotected music you own -- using GarageBand. But that assumes you also own a recent version of iLife (4.1.1 or later) and want to deal with the steeper learning curve involved in using GarageBand. Otherwise, a variety of hacks and third-party utilities can also accomplish this ringtone-creating task, each with their own pros and cons.
That's old news. What's new is that there is a new kid in town: RingtoneStudio for iPhone ($14.95 from PocketMac Software). I've already dumped all of the old alternatives in favor of this new utility. I believe you will too.
What makes RingtoneStudio the new champion? It does everything you need it to do with the absolute minimum of fuss. First off, it works with virtually any unprotected audio or even video file, including unprotected music purchased from the iTunes Store. It also works with videos such as movie trailers on Apple's site. Note: If you try to use RingtoneStudio with protected music, it may appear to succeed -- but you'll wind up with an empty file.
To create a ringtone with RingtoneStudio, simply drag the desired file to the application's window. If you're looking to select a song from your iTunes Library list, you can easily locate the file in the Finder by accessing the song's contextual menu in iTunes and selecting the Show in Finder command. If the file is already less than 30 seconds in length (which is probably not the case), RingtoneStudio converts the file to the ringtone format and imports it into your iTunes Library, as a ringtone -- all in one step. Done. Finito. That's all folks.
If the file is more than 29 seconds long (which is more or less the limit for an iPhone ringtone), don't worry. RingtoneStudio opens up a separate display from which you can select any 29 second (or less) segment that you wish to use as your ringtone. This all works similarly to the ringtone edit function in iTunes, except you don't have to pay 99 cents to use it. One more click and the edited ringtone is in your iTunes Library.
I did have a glitch with one music file: it hung RingtoneStudio (the program got stuck at the conversion stage until I Force Quit). I have no idea what was up with that particular file. But the program otherwise worked fine with everything else I threw at it.
If you plan on creating your own ringtones and want to do it as cheaply and painlessly as possible, all in one step with just one utility, RingtoneStudio is the tool you want. Get it!