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See the video tutorial on how to create playlists with Windows Media Player at http://www.microsoft.com/windowsxp/using/windowsmediaplayer/videos/playlist.asx

Instructions on how to create playlists in WMP

1. Click Start, point to All Programs, and then click Windows Media Player.
2. If necessary, click Library. You now see an expandable view of all the media items in your library. If items appear in the Now Playing list, clear those items from the list to start fresh.
3. Click Now Playing List, and then click Clear List. The list is cleared, and you are ready to build a new playlist. In this example, you will build a playlist of songs from several albums.
4. To add an album to the playlist, in the Contents pane, click the plus sign next to All Music to expand the list, and then click the plus sign next to Album to expand the list of albums. Windows Media Player expands the category and shows all the albums in your library.
5. In the Contents pane, select an album title in the list, and drag the title to the List pane under Now Playing List. When you drag an album from the Contents pane, all the songs in that album are added to the playlist.
6. To add selected songs from an album, in the Contents pane, click the album. In the Details pane, all the songs on the album are displayed.
7. In the Details pane, hold down the CTRL key, and then click the songs you want to add to the playlist.
8. Drag the selected songs to the List pane. The selected songs are added to the playlist.
9. To remove an item from the playlist, right-click the item, and then click Remove from List. The item disappears from the list. It is not deleted from the library; it is just deleted from the playlist.
10. To save your list, click Now Playing List, and then click Save Playlist As.
11. In the Save As dialog box, type a file name for your playlist, and then click Save. Your new playlist appears under My Playlists.
12. To listen to or watch your new playlist, expand My Playlists, and then double-click the playlist you just created. Windows Media Player adds the songs from the playlist to the List pane and plays the songs, starting with the first song in the list. Now you can create playlists for anything you like.

Source: Microsoft Online Help