Please use this thread for discussion related to the iPhone Software Update released today. This thread is not for discussion of hacks, jailbreaking. Please continue to use the iPhone Modifications forum for that purpose.
With software version 1.1.2, I created custom ringtones for my iPhone. I took an MP3 clip, converted to AAC, deleted both from my iTunes library, changed the extension of the file to .m4r and then added it back to my library so it was recognized as a ringtone. I synched these ringtones to my iPhone.