you can't create ringtones using songs from your own music library. you can only *buy* ringtones from itunes. so, if you want to use that song on the CD you just bought as a ringtone, you have to buy that song from itunes (and have a 2nd copy of it on your computer), and
then buy the ringtone for another $.99.
yes, it sucks, doesn't it?

if you want to use your own music library to make ringtones, you'll have to find some other software/hack to do this...