Yes, you can transform KO'd characters. I think this is in the Rise of the Combiners FAQ and is definitely implied by the ability of the Ironhide Steadfast Brawler character card.
White cards are truly double edged. While they give you an extra boost at getting additional orange or blue cards in battle, they ARE otherwise useless cards that often burn through useful action and upgrade cards in your deck. You actually want to minimise the number of whites you have in your deck to have success in battle however some of the most useful and/or powerful cards are white. It gives players another balancing act to perform when forming a battle deck.
Green cards serve a similar purpose to the whites except you are entitled to the card reclamation mechanic which primarily allows you get those enigmas back into your hand but also allows players to control their hand to a greater degree.
Overall I have to agree that the official rules are very light on detail and often confusing if not outright conflicting. This is extremely frustrating for someone new to the game and just screams "half baked product". That said it's not a terrible thing though because the lack of prescription encourages the formation of 'house rules' and the gaming community is free to fill in the gaps and establish their own fair rules of play through experience.