No, creating ring tones from music you own legally IS NOT ILLEGAL.
What's illegal is having even just a 10 second ring tone, without compensating the copyright holder. Did you even fucking read the PDF at copyright.gov? The issue had absolutely NOTHING to do with public performance. The issue is simply whether or not ringtones constitute copyrighted works for which the copyright holder needs to be compensated for.
In the case of direct audio clips its fairly obvious that would constitute a copyrighted work. If you've already paid for an album, it's within your fair use rights to make a ringtone from that. With polyphonic and monophonic tones, the court also decided that although someone needs to create them, they are working from previously copyrighted work, and thus the original copyright holder still needs to be compensated.
The issue at hand was with wireless providers and 3rd parties selling ringtones without paying members of the RIAA, the issue WAS NOT individuals using their legally purchased music to create their ring tones. There is absolutely nothing legal or otherwise preventing Apple from allowing MP3 ringtones on the iPhone.
You can do that? Really? You can set a 30 second snippit of a song you purchased through iTunes as a ringtone?
If true, that completely invalidates everything you said in the first section.
Like I said before, did you even fucking read what you linked?