Did you consider a third party disk deframenter like PerfectDisk? It does not have the free space requirements of the Windows defragmenter.

I have a worse horror story: One day our performance went through the floor and it was all due to super long disk io waits. Turned out the server administration people installed a new service monitoring package on all the servers that wrote to an MS Access file 60 times per second, inserts, updates, and deletes. It was only a few megabytes but had scattered itself to over 100,000 fragments. So the poor disk was having to dig through 100K fragments 60 times per second nonstop AND do the regular SQL Server disk IO as well.