I am relatively new to eclipse, but I have spent the last few hours searching for the solution to this problem.  
1)I recently downloaded the saxon jar files to use xslt.  
2)I put them in my ..\sun\saxon directory.  
3)I added the libraries by doing project->properties->java build path->libraries->add external jars... 
4)All the saxon8.jar files show up (9 of them). I went to Order and Export tab and selected all 9 of the saxon8.jar files (they are the last items below the src and Jre1.6.0_03).  
5)project->properties->Run/Debug Settings->Stylizer->Classpath->Add External JARs... also added the 9 saxon8.jar files. (Stylizer is the name of the class file with the main function, also the only java file currently in my project). 
6)Inside of Stylizer.java I added "import net.sf.saxon.*;". (The intellisense eclipse ability finds this package and doesn't complain about me adding it.) 
7)I have a line "TransformerFactory tFactory = net.sf.saxon.TransformerFactoryImpl();" 
Eclipse complains: "net.sf.saxon cannot be resolved to a type". I tried simplifying this java file to only contain this line, and I still got the problem.
The source code I am modifying is from: http://java.sun.com/j2ee/1.4/docs/tutorial/examples/jaxp/xslt/samples/Stylizer.java