Are you sure you're actually using 8.5? 

> 
> But this gives the error:
> 
>   FODC0005: java.io.FileNotFoundException: 
> c:\test\xml?select=*.xml (The
> filename, directory
>   name, or volume label syntax is incorrect)
> Error on line 21 of file:/C:\Test\XSL\test.xsl:
>   Failed to load collection catalogue file:///c:/test/xml?select=*.xml
> Transformation failed: Run-time errors were reported
> 
> Once that problem is solved, how do you go about getting a 
> document out of
> it?
> 
> Something like for $i in collection(...) return doc($i) ?
> 

The result of collection() is a sequence of document nodes.

So for example:

<xsl:apply-templates select="collection(....)" mode="one-doc"/>

<xsl:template match="/" mode="one-doc">
  process a document
</xsl:template>

Michael Kay
http://www.saxonica.com/