Each transformer contains an independent version number (not related to the FME version). Transformer version numbering runs 0, 1, 2, 3, where a brand-new transformer is version 0.
Whenever a transformer is updated or fixed, the transformer version number increases. That's the only time the version number changes – it doesn't automatically increase with a new FME version. Some transformers might never be changed and still have a version of 0, whereas others might change 3 or 4 times between FME releases.
When you place a transformer into a workspace, the version of that transformer is fixed. As long as that transformer remains in the workspace, its version will also remain the same. This applies even if you open an older workspace using a newer version of FME.
In FME 2007 (or newer) there is a setting in the Tools > Options (Transformers) for enabling the display of transformer versions. By default, the box is unchecked.
If you check the Show Transformer Version box, the workspace will display the transformer version in the transformer name (preceded by a colon), as well as in the tooltip that appears when you float the cursor over the transformer:
The transformer version also appears in the list of transformers in navigation pane:
A transformer's version is the version defined by that FME, so you can have a workspace that contains different versions of the same transformer. For example, if you open a workspace that has a version 2 Bufferer, and you want to place a new Bufferer, the new one may be version 3 (or 4, 5, 6 ....).
You can't open a workspace when it contains a transformer with a newer version than what is available in the current version of FME. For example, if you open an FME 2007 workspace in FME 2004, there might be a conflict in FME. That's because you may have a transformer version 4 in the workspace, while FME 2004 supports only version 1.