Creating Ringtones through iTunes
You can create custom ringtones for your 1.1.2 or higher iPhone. Follow these instructions to make ringtones for your iPhone.
Step 1:
Open iTunes (make sure you have the newest updated version) and check to see if you have a Ringtones category within your library. You will find the ringtone category on the top left side of the iTunes window filed under the Library section. Create a Ringtones folder if you don’t have one.

Step 2:
Open your PC’s Control Panel (Start > Control Panel).
Select Classic view and open the menu at the top Tools > Folder Options.

Click to select the View tab. Here you can see a list of options.

Uncheck the box next to Hide extensions for known file types and click the Apply button.

Step 3:
Restart iTunes and open the Edit menu and select Preferences.

Click the Advanced tab.

Check the box next to Copy files to iTunes Music folder when adding to library. (If you are using an older version of iTunes this window will be different. It’s always best to upgrade to the newest version of iTunes.)

Step 4:
Select the song from the Library that you want to turn into your ringtone and double click on the song. This will open the song in a playing items window.
Right click on the song and select Get Info.

From the window select the Options Tab. Check the box next to Start Time and Stop Time and enter a start time for your ringtone.

For example, if you want just the chorus of a song, set the start time to be just when the chorus starts. Also check the next box and enter the end time of the ringtone. Click the ok button at the bottom of that window.

Note: When you enter the start and stop time of your ringtone make sure you keep your ringtone to be no more than 30 seconds long.
Step 5:
Once you click ok in the previous step, there won’t be any changes on the screen. Right click on the song again, click Create AAC Version.

This will make a copy of the song, but only the section of the song you specified from start to stop. Right click on the newly created ringtone song in iTunes and click Show in Windows Explorer. This will open a new window with the ringtone and song in it. The audio file will be saved in C:\Documents and Settings\Administrator\My Documents\My Music\iTunes\iTunes Music.

Step 6:
The created music file will be in .m4a format. To play it as a ringtone you have to convert it to .m4r format. To rename the file you have two different options.
Option 1:
Following step 6, right click on the newly created ringtone in the Windows Explorer window.
Rename the file extension from m4a to m4r.

Then go back to iTunes and open the ringtones category. Drag and drop the converted ringtone from the Windows Explorer window to the ringtones folder in iTunes.
Option 2:
After creating the AAC version, drag the newly created track to your Desktop and then delete the newly created track from iTunes. A popup will appear confirming its removal from the library. Click Remove and another popup will appear. Click Move to Recycle Bin.
Go to the Recycle Bin and drag the created track to the Desktop. Rename the file from .m4r from .m4a.
Step 7:
You have finished creating your ringtone. All you need to do is sync up your iPhone or iPhone 3G with iTunes and that's it. Once you have renamed the file (under Step 6) add it back to iTunes by double clicking on it. By default, ringtones are saved in Home>Settings>Sounds>Ringtone. You will notice that the track will now appear under the Ringtones category.
It should be noted that this is not the only method that you can use to create an iPhone ringtone. Let’s weigh up the pros and cons.
Pros:
No need to rely on third party applications.
All you need is iTunes and Windows.
Cons:
Very long procedure.
Have to wait and watch out for loopholes when iTunes is updated.