you can't use songs purchased from the itunes store because they are protected.
i posted these instructions in another thread:
step by step instructions to getting custom ringtones on your iphone:
1) open the song in quicktime pro or any other audio editing software and crop the song down to less then 40 seconds (very important, songs over 40 seconds won't show up in iphone ringtones sync window in itunes)
2) save song to desktop as AIF
3) open AIF in itunes, convert AIF to AAC (m4a) 128kpbs. if you already have itunes set to rip to 128kbps AACs then just right click and select convert to AAC, if not then go into your prefs and change the importing settings to 128kbps AAC.
4). once the song is converted to AAC, select it in itunes and hit command+r to show where it is on your computer. drag that to your desktop and delete the listing for it in itunes.
5) now download the latest version of makeiphoneringtone:
http://www.macupdate.com/info.php/id/25788/makeiphoneringtone
makeiphoneringtone is free and automates the process of changing the extension and placing it in the ringtones folder and adding it to itunes.
6) open up makeiphoneringtone, drag the AAC that is on your desktop into the makeiphoneringtone window
7) connect iphone, select the iphone in itunes and check the ringtones sync window, the song should now be listed. if not but the song is listed under ringtones in your itunes library then the song may have been too long and you will have to shorten it.
Message was edited by: Host