I'm not sure if I am posting in the right place, but after an hour of messing with my iPhone, I figured out how to do this. I used Cyberduck to SSH in and instead of copying files to /Media/iTunes_Control/Ringtones, I just copied my .mp3 versions to /Library/Ringtones and there they were. No rebooting, no iTunes involved, and they are .mp3!! Sorry if this is already up here, but I couldn't find it.
yea they work as ringtones... this is the method I have been installing ringtones from the beggining... no problems with itunes, although I dunno if i have the latest/..