I'll take your questions in order.
1) All Linux will run some windows apps via 1 of 4 programs.
-Win4Lin: Install WinXP on top of Linux and they will run just as they would in WinXP
-CX Office - based on the Wine project, will run productivity software in linux such as MS Office XP and Photoshop (does have limitations)
- Wine Project - native "wine is not an emulator", its a compatiblity layer. will run many basic apps with little problems.
-Cadega (WineX) - specifically designed to run games. (
www.transgaming.com)
2) you're not dreaming.
Now for my 2 cents:
Why the hell would you get rid of windows just to wanna run Windows apps? there are thousands of native linux apps that are in many cases just as good, if not better than their windows counterparts. One thing you might consider is Cadega so you can run your games, but thats about it.
Lets take a few apps and see what Linux has to offer:
MSN - there is an MSN subsitute called aMSN, but there are also apps like gaim and kopete which will let you connect and chat to your msn buddies.
MS Office - open office 2.0 beta is the shiznit. I've been using OOo in both Linux and Windows for the last 3 years and i love it.
Internet Explorer - Firefox, Opera, Mozilla, Epiphany, Konqeror, Links, shall i go on?
Photoshop - GIMP. Granted it is "not as great" and "not as common" but it will easily let you perform all your basic photo editing needs.
Battlefield - Like i said, i have nothing against running Cadega on linux, i was a member of cadega for 1/2 year my self (recently expired). However, there are native linux games out there too you know, sadly Loki Games had to close their doors and they will be missed, but somebody will come along to replace them.
And now for your title question. It is hard to say what the "best one" is, because each one works differently on different sets of hardware, they also have unique features that one might like and the other might hate, so its up to you to try about a dozen fo em and see what floats your boat. I myself tried like 40 distros and out of them my favorite (and which i currently use) is Ubuntu.