I am using:

<xsl:function name="ercot:number-to-dollar" as="xs:string">

<xsl:param name="number" as="xs:string"/>
<xsl:variable name="digits" select="if ($number[contains(.,'-')]) then number(substring-after($number,'-')) else number($number)"/>
<xsl:sequence select="xs:string( if ($number[contains(.,'-')])
    then concat('($' , format-number($digits, '#,###.##') , ')')
    else concat('$', format-number($digits, '#,###.##') ) )"/>

</xsl:function>

It should convert:

-400.20 to ($400.20)
332.45 to $332.45

However, when it is dropping the trailing 0:

-400.20 is converted to ($400.2)

Does anyone have any ideas why?

That's what you requested by using the picture #,###.##. If you want trailing zeros retained, use #,###.00 (or #,##0.00 if you always want a digit before the decimal point).

Michael Kay
http://www.saxonica.com/
Author, XSLT Programmer's Reference and XPath 2.0 Programmer's Reference