I'm using iTunes 11.0.3 and when I right click the song (after setting the start and stop for 35 secs) I don't see the option to "Create AAC version". All I see is "Create MP3 version". Is there a setting in Preferences that I need to change?
You can also use another app such as Audacity to edit the music, and export as AAC, then change the extension from m4a to m4r, then double click on the file to automatically add it to iTunes 'Tones'. Then sync your phone, but remember to set the Tones tab in Sync to add ringtones.