Unfortunately, it IS how it is designed to work; despite others in the thread saying theirs works like an iPod, I called AppleCare after I purchased a 2nd ATV for downstairs and it exhibited the exact same behavior. The girl I spoke to thought that maybe it was a windows only thing (though I told her for test purposes I'd changed the syncing to my macbook and it worked exactly the same), so she tested from both the Macs & PCs in their lab and confirmed that she experienced the same behavior. I asked her why it didn't sync like an iPod and she said "because that's how they designed it." So I tried a different tact, and asked her if SHE thought it was logical for it to work the way it does, and of course she answered "Yes, because that's how they designed it." Quite frustrating! For my first experience with AppleCare I wasn't overly impressed (is she what they call a "Genius" or do you need to go up the foodchain before reaching the geniuses?), though I do give her credit for taking the time to go find an XP machine to test on -- I was on hold about 10 minutes while she tested that out.
Anyway, if you think it should sync like an iPod when you've checked "Sync ALL music and playlists" then definitely send an e-mail to feedback@apple.com; I only have 12GB of music, I can't imagine how frustrated I'd be if I accidentally opened iTunes without everything checked and had to re-sync 12,600 songs!! But the bottom line is I think this design decision was retarded, so I let them know that... other than that I do like them, as I mentioned I liked it enough to buy another.
Cheers,
Jim