How to host websites and create domain names on our own without using any hosting/domain registrar service?

Thats a small question with a big answer. I'll give you some of the highlights.

To host websites you need a capable machine, a capable OS, and capable internet connection, and a couple other things. How capable? That depends on how many sites and what kind of accessory programs they need.

Here is a typical Windows/IIS webserver setup.

We run dual processor 2.8 xeon machines with 4G of ram. They have a RAID drive array with 2 drives mirrored for the OS and 3 drives in RAID5 configuration for the data. They are hot swap and we keep a spare drive available for each in case of a failure. The servers are located in a co-lo at a local phone company and have static IP addresses bound directly to the machine (they do more than just serve web pages so more than one address is bound to each). They also have a second NIC which has a local IP bound to it and connected to a switch which is connected to the other servers for backend transfers. This server hosts 200-300 websites ranging from static html pages to cold fusion pages to PHP/ASP pages. The non static pages need to have software and/or databases running in the background so your machine needs to have more muscle if you are running stuff like this or less muscle if you are just hosing static sites. You will want to have FTP access to the machine so you can upload websites to it and you will most likely want a seperate IP for this. You would also most likely need some FTP server software to control access if someone other than you will be uploading sites. Once sites are in the domains directory, you go into IIS and create a new site entry. The site entry needs to point at the index page of the site. Once that is done you go into the IIS properties of that page and assign your web hosing IP to the site and add the WWW entry. From there you need to make a DNS entry. Our webservers have thier own DNS servers but you can point your registars nameserver to your server's IP directly. Most webhosts point it at thier DNS so they can have better control but you didn't ask about DNS so I will keep that simple. Once the name you have bought is pointed at your server's IP (or you DNS servers hostname) then IIS will serve up that website associated with that domain name. That is just the basics of serving the site, there is alot more to it than that but it's too much to write here.