Talismans were encountered within the wild as a monster 'possessed' by a talisman in Path of Exile, visually almost like possession by a Tormented Spirit. Talismans can possess any rarity of enemy and can always spawn possessing one. When the monster is killed, the talisman drops as an item – but if it's not picked up quickly by the player, it'll attract another enemy and possess that enemy instead. Each sort of talisman grants the monster it possesses extra combat abilities associated with its implicit modifier. Monsters only devour talismans if they're within the Talisman league or a neighborhood that normally drops talismans.
A talisman may be a sort of amulet. Talismans have their own implicit modifiers that are typically more powerful than those of ordinary amulets. Talismans are inherently corrupted, and thus can't be modified with cheap poe orbs.