nice....the recursion route seems to be the general approach, just about
scratched it out myself (w/o the part bit)

Mine can be tidied a bit to get rid of two of the tokenize()'s - first
by using current-grouping-key() for $part as it evaluates to the same
thing (bit slow this morning) and then using Georges neat way of
passing current-group() to further process the group:

<xsl:template name="process">
	<xsl:param name="depth" as="xs:integer"/>
	<xsl:param name="seq"/>
	<xsl:for-each-group select="$seq" group-by="tokenize(., '/')[$depth]">
		<xsl:variable name="part" select="current-grouping-key()"/>
		<xsl:choose>
			<xsl:when test="contains($part, '.')">
				<file name="{$part}"/>
			</xsl:when>
			<xsl:otherwise>
				<dir name="{$part}">
					<xsl:call-template name="process">
						<xsl:with-param name="depth" select="$depth + 1"/>
						<xsl:with-param name="seq" select="current-group()"/>
					</xsl:call-template>
				</dir>
			</xsl:otherwise>
		</xsl:choose>
	</xsl:for-each-group>
</xsl:template>