Can I create an Excel workbook in the isolated storage area using server side data in Silverlight?
Not as you describe it. Isolated Storage is stored on the client and server code (like WCF services) is executed on the server.
You could create the XLS/XLSX on the server and then stream it down to Silverlight, which can then save it into Isolated Storage.
Alternatively, you could generate the XLSX (or XLS in Silverlight 4) in Silverlight using data from the server. Here is an example of using Silverlight to create a PPTX, but it should be a start point for creating an XLSX (the format information for which is available on microsoft.com)
An Excel workbook, stored in xlsx format, is just an XML document. If you can form the releveant XML and save it with an xlsx extension then you have your Excel workbook.