OK, first thing you should know is that when you buy a song in iTunes, it may not be eligible to be a ringtone. Also, ringtones are separate and cost 99 cents extra, which I think is BS because you bought the song in iTunes, you should be able to use it as a ringtone on your iPhone. But anyway, lets enable the Ringtone column under View > View Options.

Check the Ringtone box. The will give you a nice little bell next to each song so that you know a ringtone is available for the song.

Now that you know which songs you can create a ringtone for, you can right click on that song in your list and select Create Ringtone.

This will present a screen at the bottom where you can edit your ringtone. Drag the blue area over the area of the song you wish to make your 30 second ringtone. You can click Preview to hear what the selected area sounds like. When you have your selection made, click the Buy button to buy the ringtone.

Now all you have to do is sync your iPhone and you will be able to set the ringtone on your iPhone.