I'm new to the iPhone, but have been using
http://audiko.net for my ringtones. You're limited to 40 seconds of the song, which I'm guessing is a way to avoid Copyright issues.
it's fairly simple to use. upload your mp3, cut out the section you want, (you have the options of fade in and fade out) then download it in the format you need. you can also search the database for ringtones made by other users.
EDIT: another plus is that you don't have to download any additional software. it's all web based.