1. Collections are easy to set up. Just make sure you register your device before trying to set them up as it won't let you if your Kindle is not registered. No way to hide books that I know of. But I am new to the Kindle myself.
2. None take any sort of card expansions. There is no way to expand memory. What you buy is what you get. So if you want more memory, go for the Touch, if you'd be ok with a bit less maybe look at the new Kindle without a keyboard.
3. Your Kindle will need mobi files, at least currently. There is a new file system coming out, or maybe already has, but for now you need to buy books in mobi format. Or if you buy in epub just use Calibre to convert the books to mobi. If you buy books with DRM though you will have to install the plug in to Calibre to strip the DRM off the epub.
As to whether to get touch or not, have a look at each model if you can in a store and decide. If you can't, then look at the specs online and choose whichever suits your needs best
