The poor transmuter has been left in his current state for a while, but the perpetual questing initiative has reminded me that he really does need attention... because he really doesn't make much sense for anyone except elves, and is horrifically bad for dwarves, gnomes, halflings, and goblins.
The big problem is that most races don't go crazy on conversion. At a certain point for gnomes and halflings, making more healing or mana potions matters little and your goal becomes to leverage the potions you already have better. Same goes for dwarves and HP and goblins and XP, you want to have a good range of abilities to utilize your superior durability and additional level-ups. The advantages of the Transmuter simply aren't worth having disadvantages for these races, since their real focus is getting other benefits in place to better utilize their conversion bonuses. The class would probably be weak for these races even without any penalties whatsoever.
Humans and Orcs, on the other hand, can get away with playing transmuter since focusing on attack damage with total abandon is a viable approach in DD. Unfortunately, there's already a class that does this much better and without having to put in additional effort; it's called the rogue. As a result, human and orc transmuters are pure novelties and basically just rogues with higher HP, but lower MP and no dodge and no first strike and a requirement to explore most of the map before their class feature actually kicks in.
The only race that makes actual sense for Transmuters currently is the elf, which can accumulate massive quantities of mana that other classes simply could never dream of. This can be combo'd off of schadenfreude potions, regular mana for its class feature. It's still a lot of work to get this operational, and he has a hard time with XP-catapults, but it does work and achieve something other classes can't (something that cannot be said of other varieties of transmuter). Given this entire class focuses around racial variability, but only functions in any meaningful way for one race, leads me to conclude that this iteration of transmuter is broken.
I hate to say "try again" on a class that's been through as many iterations as the Transmuter has, but this one just isn't working.