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Thanks for your request. Yes you can create Word documents on fly using Aspose.Words. Here is an example how to generate a simple document.
Aspose.Words.Document doc = new Aspose.Words.Document();
Aspose.Words.DocumentBuilder builder = new Aspose.Words.DocumentBuilder(doc);
There is mail merge feature in Aspose.Words. I think that you can use this feature to generate reports in your .NET application. Please see the following link for more information.
Please let me know if you need also any other information about Aspose.Words.
Could you also please attach your XSLT file for investigating?