From Diablo Wiki
The Talisman was to be a new game mechanic in Diablo III. The Talisman held charms, which are small, 1x1 sized objects that provide general bonuses to stats and other modifiers. Characters do not begin the game  with a Talisman, but receive it for an early (unnamed) quest reward, much like the salvage cube.
Charms can only be used in the Talisman, unlike Diablo 2's charms, they provide zero benefit while in the inventory.
As of 25.5.2011, the Talisman has been removed from the game, but may re-appear after the game ships.
Bashiok listed the reasoning for the removal:
Details about the talisman prior to its removal have been saved for posterity.
The Talisman was part of the inventory interface in the demo build at BlizzCon 2008. It was seen between the two weapon slots in the inventory, and when clicked a bronze, circular disk appeared over the character. There were 9 slots on the talisman, with lines connecting some of them. It had no function in the Blizzcon build, and could not be clicked or activated in any way.
In interviews at the show , Jay Wilson disclosed that it was something they were playing around with during development. It's called the "Talisman" and it's an "attribute modifier that used gems," according to Jay. There were gems to be found in the BlizzCon demo, but the talisman was not functional, so no players could attempt to experiment with it.
Jay said they'd rejected the Talisman the way it had been working, and that it was now non-functional, but that they would probably do something else with it.
Features like this are good to keep in mind when pondering the game balance and design of Diablo III. New interfaces and features can (and will) be added, such as skill runes, that radically change the balance of the game, the utility of items, and more. People not on the D3 Team can never know just how much importance to place on various issues, since what we see from the outside is not necessarily what's going on inside.
Blizzcon 2010 Update
The Talisman was revealed to be a storage area for charms, which could modify core attributes of your character. Few details were given on specific charms bonuses, though the new look of the device was shown off in the demo build. In terms of functionality, the Talisman slots unlock as your character progresses through the levels. The example in the picture to the above right shows 6 slots unlocked. It is not specifically known yet at what levels the slots unlock, but it is safe to assume that they will all be unlocked by level 60 for a total of 13 slots.
April 2009 Update
The talisman remains in the game, though no more details have been revealed. It's prominently displayed in several screenshots of the inventory that were released along with BlizzCast #8.
October 2009 Update
The talisman was not enabled at this year's BlizzCon, and no further hints were given as to its potential function. However in an interview in October 2009, Jay Wilson talked about a planned stat-boosting item/object, which is presumed to be the Talisman..
- Diablo: IncGamers: The Talisman. You said initially it was some sort of stat-boosting thing, but it’s been disabled for the past year and a half, in playable builds anyway.
- Jay Wilson: Mm-hmm. It’s still on hold.
- Diablo: IncGamers: People are wondering if there’s going to be some mechanism to allow greater character diversification in stats, given that we can not manually assign our own attribute points in Diablo 3. There will be something more than just finding +10 on an item. We’ll be able to do something more to differentiate our characters from others?
- Jay Wilson: Yes. We’re stated in the past that we’re working on a new customization system. A system that’s part of your character building. Also that within the item space we’re looking for ways for more... we really prefer the single point stat customization be more item based. But we’re going to have a system to more or less replace the attribute point spending system.
The Talisman officially debuted at Blizzcon 2010. As had long been hinted at, it's an interface option that allows characters to add additional bonus items to their character. Charms are placed in the few sockets in the Talisman, where they provide fairly small boosts to the stats and other modifiers.
Talisman images were few and far between during much of Diablo III's development, since the team kept the feature out of the public builds while it was being revised and reworked. Not until Blizzcon 2010 did full quality images of the semi-final form of the Talisman emerge.
The Talisman in the left side of the paper doll, at Blizzcon 2010.
- Talisman update - Blizzard 4/2/2011
- Removal of the Talisman - Blizzard 25/5/2011
- Blizzcon Interview - Jay Willson, 16/10/2008
- Blizzcon 2009 Interview - Diablo: IncGamers, 12/10/2009
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