I have my Apple TV setup to Sync All Unwatched Movies and Select movies with certain movies checked to keep synched. My question is after I watch a movie on the ATV it shows up in iTunes as watched, but does not get removed from the ATV. I would have thought that once it was watched it would automatically be removed from the ATV. Do I have this somehow wrong?

Apple TV now shows all movies in your iTunes library under "my movies" as long as your Apple TV is attached to the network and iTunes is open (regardless of what movies have been synced). Those movies actually synced are those movies actually copied onto the Apple TV HD. Those movies will show up regardless of whether your Apple TV is attached to the network or iTunes is open.

You may be correct about how it is working. I also did not let the movies run to the end so the play count was not advancing, even though they were marked as Not New after playing them.

It is confusing to have it this way. I am new to ATV, but didn't earlier versions only show the content that was on the local hard drive, and you needed to choose sources and then choose your Mac from there to stream content? The way this seems to be working all the content on the Mac is shown in the base list on the ATV and when required the content is streamed with no notification, other than a longer start time before the content plays. Do I have this right?

Also when I look at the device Apple TV in iTunes and drop down the content list, it seems that the movies I have watched are still listed there. Why would that be?

Just answered my own question, if you check the box on the Summary tab in iTunes for the AppleTV Show Only Synched Content on Apple TV, everything works as I expected.