I finally figured out the play lists ..
I built my playlists from my iTunes library (File > Library > Export Playlist)
I then edited the resulting M3U file using textwrangler.
Here are the key changes I made were:
1. remove the text "EXTM3U" from the first line
2. change the file path to be referenced from the root of the SD card. So instead of "/Users/doug/Music/iTunes/iTunes Media/Music/P.D. James/Private Patient/
" becomes just "P.D. James/Private Patient/
3. If you are using Mac OSX or Linux, change the "/" to "\"
4. Save the file in Windows format (which uses CRLF as opposed to CR for the end of line).
5. Save the playlist to the root of the SD card, it will not work in a sub-directory.
I saved the mp3 files in subdirectories in the layout of /Author/Book/track.mp3
:11,Intro A - P.D. James
P.D. James\Private Patient\1-01 Intro A.mp3
:16,Intro B - P.D. James
P.D. James\Private Patient\1-02 Intro B.mp3
:32,Authors Note - P.D. James
P.D. James\Private Patient\1-03 Authors Note.mp3
:200,Book One - Chapter 1a - P.D. James
P.D. James\Private Patient\1-04 Book One - Chapter 1a.mp3