With iTunes 10, Apple removed the ability for users to create ringtones in iTunes, but not their ability to buy them or create them elsewhere.
iPhone Ringtones Via iTunes App
On the iPhone, you can still buy ringtones from iTunes using the built-in iTunes Store app. To do this, simply tap the "More" icon at the bottom right of the iTunes Store app screen. In the list you'll see, Ringtones is an option. Tap that.
Here, you'll see a selection of iPhone ringtones for sale. The difference between these and those created in the iTunes editor is that you can't customize these. You're buying them as if they were songs. Still, you get the ringtones you've been looking for.
There are also iOS apps that can make ringtones easily and effectively. Check out these apps:
Create iPhone Ringtones in GarageBand
Mac users can employ Apple's sound editing software, GarageBand, to create their own ringtones. Music purchased from the iTunes Store likely won't work with this method, but music ripped from CDs or purchased at other MP3 stores should.
Create Ringtones in Other Sound Editors
If you don't have GarageBand or use a PC, sound-editing programs that let you grab snippets of songs and save them as audio files should work.
With both GarageBand and other sound editors, make sure that you're saving the ringtone as a .m4a, the file type Apple uses for iPhone ringtones.