I am a non-resident who worked a bunch of hours in NY for 2006. My NY W2 box 16 has my total amount of wages (e.g. $100) instead of just the portion of my wages that I earned in NY (e.g. $25). My company's payroll is insisting this is correct and follows state law. However the amount withheld Box 17 was clearly calculated on the $25 number. All my other state W2s for non-resident states show only the state portion. My question is this: when I fill out my NY income tax, does that mean I'm supposed to enter $100 as my NY state wages? That doesn't make sense to me.

Your payroll department IS correct; that IS state law.

There is Form IT-203-B to allocate your income to the various state.