Step 1
This is what we call CD-Ripping. First we need source file and that's a
.WAV file. Lets say you have an audio CD with songs you want to
make into mp3's. Now put the CD in your CD-ROM. Well, to copy and
convert a track off the Audio CD into a .WAV you'll need WinDAC. This
program grabs audio tracks from CD and converts them into .WAV.
So start it, copy any track onto your HDD using WinDAC, and you'll
see on it new .WAV with lot of MB's and that's the reason why MP3
compression is used.

Step 2
This step is what we call Encoding. Now when we have .WAV file we
are ready to encode it. For that we will need an MP3 encoder.
MusicMatch Jukebox and Xing AudioCatalyst are the best two out
there. Run the mp3 encoder, select the .WAV you want to encode
and PRESTO!

Step 3
Now you can test your first MP3 by opening it in an MP3 player.
The best two are Winamp and Sonique.