While considering purchasing iToner to use custom ringtones on the iPhone, I saw that they had a tech note on a workaround to use iToner with the latest iPhone software (1.1.3).

The tech note pretty much gave away that you don't need iToner at all... you just need to get your desired ringtone in AAC format with a file extension of .m4r.

Here is how I do it:

1. Use the free cross-platform audio editing application Audacity (download) to edit your desired ring tone. You can use an MP3 file as the source, or your microphone, etc. The result must be 40 seconds or less.
2. Save/Export as a .WAV file.
3. Drag the WAV file into iTunes.
4. Use iTunes to convert the song to AAC format.
5. Drag the resulting AAC file to your desktop and change the file extension from .m4a to .m4r.
6. Drag the .m4r file back to iTunes.
7. It will now show up in the ringtones section. Correctly set the song name and artist information.
8. Sync your iPhone.
9. Enjoy.

Hope that saves someone $15.