1. Built-in Paravirtualization.
Not sure what you mean, but Fedora has builtin KVM virtualisation, and Ubuntu has VirtualBox available. Intalling a Virtual client is easy, and can be used on other machine's VMs once prepared.
Because Linux distros offer so much choice on performance and application mix, it is better to build your own for what you need, then copy and use that for your clients.
2. Applications on Demand.
As others have said, just too many applications to do this. Ubuntu has over 23,000 in its Synaptic repository, but the most popular have been listed in the easy to use Add/Remove menu item. This would seem a better way of doing what you want.
3. Microsoft Office
Do what everyone else does who needs Office - buy Crossover Office and load your own paid for copy.
Some pay for distros come with a version of Crossover pre-installed.
4. A Non-Windows-Looking-Acting-Emulating Window Manager
The Windows Window Manager is an implementation of the XEROX WIMP. Renditions have been available on workstations since it was invented back in 1974. Windows 95 onwards was based on Apple MAC which was based on the XEROX WIMP. It is Windows that looks and works like the others, not the other way round. Actually X versions offer more, like virtual desktops, zoom in virtual screens, multiple X sessions, nest to another user, etc.
Maybe you should look at GNOME with its menu bar along the top. Definitely not Windows like.
5. Interaction
Gee, what old Linux distro are you using? Or are you using a Virtual Machine that needs its virtual ports setting up correctly? Try installing a modern one natively, like Mandriva 2008, Fedora 9, or Ubuntu 8. They all auto mount and bring up a file manager or relevant program when devices like memory sticks, digital cameras, USB drives, music CDs, video DVDs, etc are plugged into a port.