It is very easy to create free ringtones for your iPhone 3G using only iTunes and songs you already have on your computer. This tutorial shows how to perform step by step. It only works with songs that are DRM free. To create ringtones using DRM protected songs, you need first strip the DRM off and then follow the guide. This method has been tested and works with iTunes 7.7.1 and iPhone 2.0.1 firmware. Actually, my friend told me he had tested it with iTunes 8 and it worked smoothly as well, though there were several differences in making settings due to the update of iTunes.

And here is the tutorial: http://www.tuneclone.com/how-to-free-custom-ringtones-for-iphone-3g.php