That's many questions.
Here are some answers.
I notice there is 12 GB reserved for recovery partition. Should this be present even though I've turned restore off? Yes, System Recovery is different from System Restore.
Oh yes, on many of these matters,
WIN key (that's the one with the funny looking, wavy flag on it) + F1 key
That gets you to Win 7 Help. Once there just enter, for example, System Recovery.
I notice there is 12 GB reserved for recovery partition. Should this be present even though I've turned restore off? Leave it be!
I'm wanting the remaining hardrive 500 gigs or so to be my remaining 2nd partition. Is default allocation unit size best for this? Yes.
Do people manually defrag or let auto drfag for Windows 7? Some manually, some auto. I use manual.
Microsoft did improve their defrag. Once again, use Win + F1 for more info and/or google this topic.
Others may have other experiences, but I've not found defragging to be of much importance as in the XP days.
My intuition tells me that you had better make yourself a System Repair DVD (see left-hand pane of Backup & Restore). And you probably should take advantage of the simple, easy-to-use, solid Backup & Restore capability of Windows 7.
Enjoy Windows 7 and I'm sure that some of the others will come forth with still more answers and suggestions for you.