Ugh, I too learned all this the hard way.

1) Go to iTunes -> Preferences
2) Go to Advanced
3) Uncheck Keep iTunes Media Folder organized
4) Uncheck Copy files to iTunes Media Folder

The iTunes Media Folder location should point to where you music is located.

If you drag files from the finder/Explorer into iTunes and/or Playlists, the files will be added to the iTunes XML database but it will stay in it's original location.