It's really really really easy.
Pick a song, Right-click and select "get info"
Select the "Options" tab.
set your beginning and end times to the part of the song you want for the ringtone (the total time from beginning to end for your ringtone can NOT exceed 30 seconds).
Then click OK and right click the song again. Select "Create AAC Version"
When that finishes, right click the newly created song and select "Show in Windows Explorer"
The song will be highlighted in the folder that pops up.
Rename it's extension from M4A to M4R
Now just add your newly created ringtone file into itunes and thats it... (you can just drag the file onto the itunes app and it'll be added for you)
Thats about it, sync your phone (make sure your phone is setup to sync Ringtones or it won't copy to the phone)
You set the ringtone on the phone under Settings>>>Sounds>>>Ringtone