I have spent a lot of time in XSLT and found that while it is a useful tool in some situations, it is definitely not a fix all. It works very well for B2B purposes when it is used for data translation for machine-readable XML input/output. I don't think you are on the wrong track in your statement of its limitations. One of the things that frustrated me the most were the nuances in the implementations of XSLT.
Perhaps you should look at some of the other markup languages available. I believe Jeff did an article about this very topic concerning Stack Overflow.
Is HTML a Humane Markup Language?
I would take a look at what he wrote. You can probably find a software package that does what you want "out of the box", or at least very close instead of writing your own stuff from the ground up.
