After much trial and error this worked in my scenario, adding both the telephone number e.g. 8989, and the transformed extension 8*989 as a separate extension.

<Extensions>
    <Extension>
        <xsl:value-of select="telephonenumber"/>
    </Extension>
    <Extension>
        <xsl:value-of select="concat((substring(telephonenumber,1,1)),'*',(substring(telephonenumber,2,3)))"/>
    </Extension>
</Extensions>