There are a few things to know about using favourites (note the Canadian/British spelling the player uses? That's right...we love our 'U's).
Firstly, it's not so easy to do within the player. It takes a good deal of time, and typically it's a good idea to navigate your player twice - once to decide on what you'd like to add, and second to add the files. I only suggest this because, depending on file names, it can take a while to figure out which track is which. If you're very familiar with your albums, however, this isn't an issue.
Also, as far as I know, you can only have one list at a time.
List Creation Procedure:
1) To create a playlist, you have to go into your resource manager > into the album folder > move down/up through the tracks in that album > once you've found a track you'd like to add press the RIGHT navigation button and select 'Add to Favourites' (Note that the default position is 'Delete File', so be careful of that.)
2) Continue doing that with every track that you would like in your favourite list.
3) Once you've made all of your choices hit the LEFT button to navigate back to the menu options and select 'Music'. The very last option in the music menu is 'Favourite'. Enter that and you'll be able to play from your list.
NOTE: The favourite list you've created will disappear if you ever hit a 'reset', thus you will have to create it all again from scratch.
I don't know if there's a way to create a playlist externally and add it to the player's onboard memory - so I'll leave that to someone else, if it's at all possible. The favourite list is handy, but as you can only have one at a time it's not the best solution out there.
I also find that the 'random' play setting to not be very good - used this with a Favourite List once and it played some tracks multiple times before moving on. Not idea.
That's all I can contribute to the subject, I'll leave any advanced techniques to the experts here