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Though they come in many different types the Embalming Tool has no purpose other than being sold.
The Embalming Tools appear to have played a role in the preservation of the Draugr. They are seen mainly in Nordic ruins. The Ancient Nords were credited with being extremely skilled at preserving their dead.
Embalming Tools can also be found in various "torture chambers," such as the one in the Dawnstar Sanctuary.