Here a couple of ways to create and use your own custom ringtones on the iPhone for free:
GarageBand (require: iLife)
For GarageBand users Apple’s latest update; 4.1.1 allows iPhone users to easily create their own Ringtones.
If the song you want is in your iTunes library; simply drag and drop the song from iTunes to Garageband into a new track.
Turn the cycle region on.
Adjust the cycle region of the song to accommodate what part of the song you want the ringtone to be; it can be any part of the song but must be 40 seconds or less.
Choose Share > Send Ringtone to iTunes
Sync with your iPhone, change your ringtone and have a friend phone you.
Via LifeHacker.However this expects you to own iLife which some users don’t so here’s another way which everyone can do with QuickTime that comes with every installation of Mac OSX.
QuickTime
Open the Song in QuickTime
Adjust the Selection Indicators to where want the ringtone to start and end (>40secs)

Copy the selection (?C)
Open new QuickTime Window
Paste the selection (?V)
Export (?E) the file as “INSERT_NAME_HERE”.m4r

Double click on the newly created Ringtone (in the Finder)
Sync with your iPhone, change your ringtone and have a friend phone you.
Unfortunately there are a few more steps but it just as simple, will work on both Macs and Windows and it is 100% free.Update: Apparently the regular version of QuickTime doesn’t have Selection Indicators so doing it that way will cost you $29.95. However you can accomplish this with any Audio Mixer/Editor; for example use Fission’s trial to edit the song into the ring tone you want and save it as .m4r. Or as Brad’s comment below shows you can also do this with the open source Audacity.

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