There is also a way to do this all from within iTunes.
1) Find a song that you wish to make into a ringtone.
2) Right-click on the song then left-click on "Get Info" and navigate to the Options tab.
3) Set "Start Time" and "Stop Time" for desired ringtone playtime. (You may experiment and adjust it perfectly to your liking, use decimals for increased accuracy such as 1:02.4)
4) Right-click once again on the song and left-click on "Create AAC version"
5) Right-click the newly created AAC version of the song (length should be however long you set the start and stop time to) and then left click on "Show in Windows Explorer" if your on windows or "Show in Finder"? if on mac (Don't have mac, not sure what it says, just use garageband, its free).
6) You will then see the file in your folder "Nameofsong.m4a", simply right-click and rename it to "Nameofsong.m4r" *If you don't see the file extension and only see the name of the song in the folder, go to the "tools" tab in the folder and then "folder options", then navigate to the "view" bar and uncheck the box labeled "Hide extensions for known file types" and it should appear and let you edit it*
7) After editing the name you might get a pop-up stating: "If you change a file name extension, the file may become unusable. Are you sure you wish to change it?". Left-click "Yes".
8) Now double-click on the newly renamed file so that it will play in iTunes (if it doesn't play in iTunes automatically for some reason, maybe its not set as your default player, just right-click on the file and go to "open with..." and select iTunes from the list.) If that still doesn't work backtrack and see where you faulted.
9) If done correctly iTunes should begin to play the desired ringtone and display it in the ringtone folder.
10) Now all that's left to do is to delete the old AAC version and reset the "Start Time" and "Stop Time" under the options tab of the original song (You can simply just un-check the boxes and it will revert back to original times). Finally, make sure you iPhone is setup to sync ringtones from your iTunes library and enjoy!
To hear these ringtones on your iPhone and select them go to the "Settings" application, then click on "Sounds", then click on "Ringtone"; they will be listed under "Custom". If you run into any problems post them here and I will try to help you out. I did this using Windows XP, steps in Vista should be relatively similar.
though I'll have to update it to change the ssh meathod I think that meathod I have stated won't work for 3.x.x