The Collection acts like a set of pointers to the files in the Collection, but as you've noticed the books still show up in the main listing. And yes, it's annoying. You also can't delete a book from a Collection and get it out of main memory -- you have to deal with the main lists to delete stuff.
You should be able to drag the entire filled Collection from Connect to the Reader, however. You have to drop it on the "Sony Reader" level, it won't let you drop it anywhere else.