One other thing I thought of to try was to plug in Kontakt 2 as a VST - I usually plug in as a DXI - that did it!!! In fact, I opened a brand new project, had one instance as a DXI, the other as a VST and the VST transposes (as it should with the key+) and the DXI does not - in the very same project!
I don't know what difference it will make overall, opening in VST instead of DXI, but that made the difference in being able to use the transpose keys.
I guess it isn't really solved, since there is still the problem in the DXI, but it is one step closer. I am curious as to what format the readers of this forum use the Kontakt player.
Thanks again to all and especially Jon and Reegs for helping out!