try this

xml file
<?xml version="1.0"?>
<test>test worked</test>

xslt file
<?xml version="1.0"?>
<xsl:stylesheet version="1.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
 <xsl:template match="/"><xsl:value-of select="test"/></xsl:template>
</xsl:stylesheet>

cheers, jim fuller

<?xml version="1.0" encoding="iso-8859-1"?>
<?xml-stylesheet type="text/xml" href="style.xsl"?>
<test>test worked</test>

with your style sheet - still didn't work!
I tried it both locally and on my server - to no avail!