OK, this is not a new tip and has been discussed on the web before, but that doesn't mean that everyone has seen it, so here goes (yes I also know that ringtones can be created in GarageBand - that's how I make them, but not everyone has the latest version of GarageBand):

1) First off, the file that you want to make a free ringtone from can't be one that you purchased from iTunes (ie. rights protected). It can be an MP3 or AAC file. So select the file you want to use in iTunes.

2) your ringtone can be up to 30 seconds. So listen to your audio file and locate the 30 seconds (or less) that you want to use and note the current time interval in the iTunes display. In other words at what point in the song do you want the ringtone to start. Once you find this area, you can stop the song from playing

3) Hit Command-I on the keyboard to bring up the info dialog and switch over to the Options tab. Here is where where you're going to enter the start and stop times of your 30 second (or less) snippet. Make sure the boxes are checked for Start and Stop time. Then click OK to lock it in.

4) Make sure you have your iTunes Importing Preferences set to AAC. You can find them in Preferences and then Advanced and then go to the Importing tab.

5) Select the song that you just set the time for and choose Convert Selection to AAC (even if it's already an AAC file), this will make a new 30 second copy of the the song you had selected.

6) Now control click (right click) on the NEW 30 second version of the song and choose Show in Finder. Copy or move this file to the Desktop.

7) Go back to iTunes and DELETE it from iTunes (important step).

8) Now select the one on your desktop and change the file extension from .m4a to .m4r

9) Drag it onto your iTunes icon in the dock to import it back into iTunes as a ringtone.

10) the ringtone should show up in the Ringtones area of iTunes and you should be able to choose it when you sync your iPhone. Enjoy!