Or you can try this out, I know someone who has done it and it works. Not sure if it will work on the latest iTunes updates since 7.4.
It goes basically like this: iTunes uses the m4r file extension for Ringtones. If you copy an AAC file from your library and rename it from .m4a to .m4r and then add it back to iTunes, the program reads it back in as a ringtone rather than a normal library track. You can then sync it to your iPhone. I've tested this with both an MP3 that I converted to AAC and with a track I purchased from the iTunes store. They both worked.
The secret lies in making sure the name change happens properly. This isn't a big problem on Windows. On the Mac though there are protections in place to keep you from renaming the file extension--this isn't to keep you from making ringtones. It's to keep you from hurting your files. So either do the rename in Terminal or select the file you want to rename and open the Info window. Scroll down to the Name & Extension field and change the extension to m4r there.
At this time, the m4r items do not appear in your Library. You can only see them when you select an iPhone in the sources list and then click on the Ringtones tab.