From Mac Guides
As of Tunes 8, this process appears to be unnecessary as media files can be assigned to audiobook status from within iTunes. Get Info -> Options -> Media Kind: Audiobook.
iTunes and the iPod have special support for audiobook content. iTunes and iPod compatible audiobooks can be purchased from the iTunes Store, or from partner Audible.com. Bookmarking, i.e. remembering the position in the file that you last reached when you were playing the file and variable speed playback are two features that have typically been reserved for audiobook content. While bookmarking has been extended to podcasts and a checkbox has been made available in iTunes to set this on any file, the vaiable speed playback is still only available to files iTunes sees as audiobooks. Since iTunes 7, audiobooks content has been displayed in a separate section of the iTunes library.
Creating an audiobook
Things that don't work
There does not appear to be a way to mark any MP3 file as an audiobook in iTunes. The file must be either an M4B file or content from Audible.com (.AA). You must first convert/recode your MP3 files to AAC which can degrade their quality if the original MP3 bitrate was already low. If you are starting from an MP3 file, proceed with that in mind.
Steps that work
It can help to use the Join Tracks function early in the process to go from typical 3-5 minute tracks to either chapters, or complete CDs. Rip to AAC, and make use of the podcast optimized settings instead of 128 kbps stereo. You will now have a bunch of M4A files in your iTunes library.
Converting M4A to M4B
While it has been reported that this can be as simple as changing the filename, it is far more robust to actually modify the file's internal file type. This can be done with a variety of tools, including the Make Bookmarkable script from Doug's Scripts. If you are on Windows you may wish to purchase MarkAble from iPodSoft ($15 USD).
Note: Version 2.0 of the "Make Bookmarkable" script from Doug's Scripts automatically removes and then reloads your audio files back into iTunes. By using it you will not have to manually do these next two steps. This feature of the script only works with iTunes 7 and later.
Remove the converted tracks from your library
Reveal the location of the files by right/control-clicking on the files and choosing "Show Song File". Move the files you have converted out from the iTunes library, and place them (for example) on your desktop. Go back to iTunes and delete the listings there (they should now have an excalamation point next to them).
Add the files back to iTunes
Drag the previously removed files back to your iTunes library where they should now be seen as audiobooks.