Why does this isolation transformer have another transformer in it?

That "transformer" is a common mode choke.

It's used to suppress EMI (either being induced onto the line and affecting the circuit or being transmitted from the circuit out over the line).

It's called "common mode" because it's very effective in suppressing HF currents that are common to both lines.


That is what's known as a common-mode choke. It presents a high impedance to any common-mode currents which might flow in the + and - pairs. Any common-mode currents which flow in the attached ethernet cable will have a strong tendency to radiate at levels in excess of legal EMC limits.

An ideal common-mode choke will present no impedance to differential currents as their developed fluxes will tend to cancel due to being equal in magnitude and opposite in direction.