When you buy from iTunes you download MPEG 4 AAC ADVANCED AUDIO CODING. Anything you buy from them appears in Purchased Music and cannot be converted to MP3 if you right click on a track it will give an option Convert to MP3 but when you try you'll get a security warning.
When you import into the library from your own CD's it will also import as MPEG4 but these can be converted.
Latest version of iTunes is Version 6 Plus No 188.8.131.52 includes video now
Use the HELP button in iTunes when you are online!