You don't have to use XSLT (iiek!) at all to use FOP. I have good experience with generating the FO code directly via a templating system. It just makes no sense to output XML, just to let some XSLT transform it afterwards (unless you have another use for the xml of course).

1) What format needs to be used when generating the initial xml doc?
None. It's the point of XSLT that you can (theoretically) transform every xml into every other xml.

2) What are the stylesheets and how can they be generated?
(XSLT) stylesheets are transformation rules, that are used to transform xml from one format to another. You generate them using an editor or a transformation tool. Afaik, there is no such tool for free. Those I know of are really, really expensive. XSLT is also very ugly and VERY talkative. If you dont really have to use it: avoid it.