During the Aetherium Wars many powerful relics were stolen. This is why Tonal architect Karagas built the Transmutation Forge. Using the machine he could hide Aetherial Relics by transforming them into useless junk. It does appear that only items of the same nature can be transmutated, so battleaxes can only become battleaxes and boots can only become boots. It does seem to have some limitation as well, especially when helmets are concerned. Best use it with care. ~ Madras
This machine can be used to switch enchantments and stats from one item to the other. In game uses are limited to aesthetic value. One could transmute a powerful unenchantable weapon with a cool looking, but weak weapon. Examples are many of the unique Daedric enchantments or weapons from questmods.
Source: The LOOK of the result item
Subject: The STATS of the result item
The Source item will remain unaltered. The Subject item will have its looks changed.
Changing the appearance of an item (For example, a Steel Mace) will change the appearance of EVERY copy of that item (pre-existing and newly created). Curiously, it does NOT change the appearance of Pre-Enchanted variants (in the same example as before, a Blessed Steel Mace) of that same item. The changes incurred by the forge will be reverted once you close the game, so there is no need to worry.
- There is no mention of Karagas or his forge in the official ES lore.