> I need to modify an existing XML  using XSL. What the XSL should do is,

You've structured the question nicely so it can be translated directly into
XSLT: one template rule for each of your three cases.

I suspect that when you say "nodes" you mean "elements": if not, change "*"
to "node()".
> 
> 1)Copy the existing xml as it is.

That's an identity template rule:
<xsl:template match="*">
  <xsl:copy>
    <xsl:copy-of select="@*"/>
    <xsl:apply-templates/>
  </xsl:copy>
</xsl:template>

> 2) Count number of sub nodes under a certain node , if count 
> is less than 
> some value (say 2) append another new subnode to that node 
> for the new XML.

<xsl:template match="*[count(*) &lt; 2]">
  <xsl:copy>
    <xsl:copy-of select="@*"/>
    <xsl:apply-templates/>
    <subnode/>
  </xsl:copy>
</xsl:template>

> 3) Count number of sub nodes under a certain node , if count 
> is greater than 
> some value (say 1) remove the last node from that node for 
> the new XML.
> 

<xsl:template match="*[count(*) &gt; 1]">
  <xsl:copy>
    <xsl:copy-of select="@*"/>
    <xsl:apply-templates select="*[position() != last()]"/>
  </xsl:copy>
</xsl:template>

Michael Kay
http://www.saxonica.com/