I'm delighted to hear you've made progress đ
I've been thinking and playing a bit too. It turns out I sync all my music (successfully), but if I were to only sync a part, here's what my music sync page would look like:
The big difference I see is I don't have collections - and never did. Anyway, I'm wondering if the issue is somewhere in your computer's music library having gotten confused somewhere along the line. I suspect you've had your iTunes setup for a long time (many years). It would be drastic, but I'm wondering if you would consider some iTunes library reorganization processes. Of course, I understand if you don't want to go this way.
One option is to delete the iTunes database file, but that would delete all your playlists, song ratings, etc. It would then be rebuilt from scratch. That's very drastic, but here's a writeup about it: http://support.apple.com/kb/HT1660
Another option is to do something like go to iTunes' Preferences > Advanced and check "Keep iTunes Media FIle Organized." Or from iTunes' Files menu item, you could choose Library > Organize Library and then one of the two following choices (probaby "Reorganize Files ...).
Finally one thing you do that I've never seen before is in your summary options area, you are converting higher bit rates to 256K AAC. I've never seen that, and hope converting MP3 to AAC doesn't cause you problems. This little snip from iTunes' help just aroused my suspicion a bit about this action:
Anyway, glad you're headed down the path of progress!