The ArcGIS Server is 10.11 but the ArcSDE database is 9.3. There was an issue earlier with the 9.3/10.1 incompatibility that was fixed with a service pack update. We have been thinking that this may be another issue with the older database. I have a different test environment that runs 10.0 and the transformation works fine. It is just in this environment that things aren't happening as they should.