This isn't made very obvious and took a bit of googling to work out, so here we are...
1. Get the mp3 that you want to use as a ringtone, take a section of it (30 Seconds max) and save as a new mp3.
2. Import or drag/drop this new mp3 into iTunes.
3. At this point it is wise to set the Artist and Title of the track
to make step 5 easier. I also put the mp3 in a new genre called
'ringtones', because I'm an over organised geek :)
4. Right Click the new mp3 in iTunes and choose 'Convert to Apple Lossless Format'.
5. Once the conversion is complete iTunes will have made a copy of
the file in m4a format in the iTunes music subfolder of your music
directory.
For example...
If the track was Sunshine Underground by The Chemical Brothers, the track will be located in
my music\iTunes\iTunes Music\The Chemical Brothers\[Album Name]
6. Once you have found the m4a file, rename it to m4r.
7. Double click the m4r file and iTunes will magically switch to the ringtones category and voila, there it is.
8. Now all you gotta do is sync it to your iPhone.