There are several ways to create iPhone ringtones. As you already know, the Apple way of doing this is not free. One of the free, yet, legal ways to create iPhone ringtones is described in this article from eHow.com. However, even that method while free is not that hassle-free. After all, there are 17 steps involved. If you appreciate your time and want to get things done quickly, then you'll find iMakeRingtones.com absolutely lovely service. iMakeRingtones is free and easy-to-use service.
Of course you can always use iToner from Ambrosia Software if you are on Mac or iPhoneRingtoneMaker from Efiko Software if Windows is your operating system of choice. Both of the applications are easy to use but cost $15.
If you happen to have a Jailbroken iPhone, you can just install an SSH software and interact with the iPhone's file system directly (this is my favorite method by the way). While this method technically is not complicated, it's still to be used by advanced users. To sum up, I recommend sticking with either iToner or iPhoneRingtonesMaker or just using the free iMakeRingtones.com service.