Just for fun, a slightly less elegant version that implements the caching suggested by Marc:
    public static string TransformXMLToHTML(string inputXml, string xsltString)
    {
        XslCompiledTransform transform = GetAndCacheTransform(xsltString);
        StringWriter results = new StringWriter();
        using (XmlReader reader = XmlReader.Create(new StringReader(inputXml)))
        {
            transform.Transform(reader, null, results);
        }
        return results.ToString();
    }
    private static Dictionary<String, XslCompiledTransform> cachedTransforms = new Dictionary<string, XslCompiledTransform>();
    private static XslCompiledTransform GetAndCacheTransform(String xslt)
    {
        XslCompiledTransform transform;
        if (!cachedTransforms.TryGetValue(xslt, out transform))
        {
            transform = new XslCompiledTransform();
            using (XmlReader reader = XmlReader.Create(new StringReader(xslt)))
            {
                transform.Load(reader);
            }
            cachedTransforms.Add(xslt, transform);
        }
        return transform;
    }