> It seems that calls to xsl:apply-templates from within an xsl:for-each
> loop are ignored. 

No, they are processed as usual.

> If the question sounds vague,
(more than vague)
>  Is this the only approach? 
You haven't said what approach you are using, but there must be other
ones.

Clearly you have some XSL that isn't working as you expect, but
you only showed an input document and not the XSL so it is all but
impossible to debug the XSL for you.

> I use "xsl:for-each" to get the wrapping that I need, 

why?

It looks like you just want.
<xsl:template match="parent1">
 <wrap1>
  <xsl:apply-templates/>
 </wrap1>
</xsl:template>

<xsl:template match="parent2">
 <wrap2>
  <xsl:apply-templates/>
 </wrap2>
</xsl:template>

<xsl:template match="child">
 <childstuff>
  <xsl:apply-templates/>
 </childstuff>
</xsl:template>

David

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