iPhone: Create Your Own Ringtones

Click on Edit on the file menu and select Preferences. From the General tab, click the Import Settings button next to the When you insert a CD option.

This is where you need to make sure that the Import Using option is set to AAC Encoder.

Given that the settings for import settings are configured properly, we can now convert our .mp3.  Right click on your .mp3 and choose Create AAC Version.

This will create another song for you at the given length and in the .m4a format.