Hi, Randy, welcome to Apple's user-to-user discussion forums.
iTunes does not use m3u files. It will open them for streams, but it does not store them. You need to import the tracks into iTunes. Normally, you can just let iTunes do all the housekeeping behind the scenes. If you want to handle the directories yourself, then open iTunes preferences and, in the Advanced > General section, uncheck "Keep iTunes Music folder organized" and "Copy files to iTunes Music folder when adding to library". Realize, however, that handling the file structure yourself makes it easier for iTunes to loose track of songs.
Once the tracks are listed in iTunes, you can make playlists or smart playlists that would duplicate the function of the m3u files.