The preponderance of evidence on the ringtones problem points to it being caused by a failure of the tool in Android that scans the media on the sdcard. This usually happens if it encounters a filename with characters it can't recognize. The solution is to clear the weird files off the sd card. Once it fails, I don't believe it tries again, so a new data.img is probably required.
It's possible that moving your android install to /sdcard/andboot/ and grabbing
a new initrd.gz will cause the media folder to get read earlier in the process (under the As instead of under the Ms) and thus get loaded before the scanner fails.
All that said, I think if your ringtones don't load, you get a generic sound for a text message, instead of no sound, so this might not even apply to you, ajskhan. Have you checked that you have a notification ringtone set and working, that the volume is up, etc? (All this is in Settings -> Sound & Display)