I haven't done collections so I will limit my response to #1 only.
It does free up all the space when you remove a book from the internal storage. Depending upon the type of book you are storing, the Sony Reader will perform some packing (compression) of the file when it is loaded. (LRF files are already compressed.) So even though it may report as a 1.2 Meg RTF file, it may only occupy .9 Meg of internal storage. RTF and TXT files seem to demonstrate this quality while LRF and PDF do not. Files loaded outside the CONNECT software on an SD card or Memory Stick retain their full size.
There are no published defragmentation utilities for the Reader. The only method I can think of is to completely remove all files from the internal memory and start again. Given the speed of the internal memory and the file I/O requirements for most files, even a heavily fragmented memory would not slow the Reader.
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