The answer is going to depend slightly upon if the application is running on a server or if it is running on the client machine. If you are running on a server then you are going to want to use one of the XML based office generation formats as there are know issues when using Office Automation on a server.
However, if you are working on the client machine then you have a choice of either using Office Automation or using the Office Open XML format (see links below), which is supported by Microsoft Office 2000 and up either natively or through service packs. One draw back to this though is that you might not be able to embed some kinds of graphs or images that you wish to show.
The best way to go about things will all depend sightly upon how much time you have to invest in development. If you go the route of Office Automation there are quite a few good tutorials out there that can be found via Google and is fairly simple to learn. However, the Open Office XML format is fairly new so you might find the learning curve to be a bit higher.
Office Open XML Iinformation
To generate Word documents with Office Automation within .NET, specifically in C# or VB.NET:
Add the Microsoft.Office.Interop.Word assembly reference to your project. The path is \Visual Studio Tools for Office\PIA\Office11\Microsoft.Office.Interop.Word.dll.
Follow the Microsoft code example you can find here: http://support.microsoft.com/kb/316384/en-us.
I currently do this exact thing.
If the document isn't very big, doesn't contain images and such, then I store it as an RTF with #MergeFields# in it and simply replace them with content, sending the result down to the user as an RTF.
For larger documents, including images and dynamically inserted images, I save the initial Word document as a Single Webpage *.mht file containing the #MergeFields# again. I then do the same as above. Using this, I can easily render a DataTable with some basic Html table tags and replace one of the #MergeFields# with a whole table.
Images can be stored on your server and the url embedded into the document too.
Interestingly, the new Office 2007 file formats are actually zip files - if you rename the extension to .zip you can open them up and see their contents. This means you should be able to switch content such as images in and out using a simple C# zip library.