About a foot shorter than the average human, Goblins appear primarily in the swamp stages. They can be wearing nearly any standard armor, or equip any weapon in the game. Goblins will pick up items dropped and equip them immediately. DO NOT allow them to walk over an offensive magic staff. If playing co-op, they can walk over your dead friends item pile and make for an interesting fight. Typically higher end HP and AC. Can wield bows, melee weapons or magical staves. Approach magical goblins with extreme caution. They often wear cloaks, which can be of protection, magic reflection, or even invisibility!
Yes they can spawn or pickup cloaks of invisibility. You'll be able to see them with a ring of warning, or hear them nearby. Lighting them on fire also would help with location if this happens. Don't worry too much as it's only happened once to me. (Bronymon)
"These guys are scary things. I think they were people, miners put to deep down into the mines and just...devolved. Kinda like the gnomes. They look like people, but are smaller and greenish. They's huntin' in packs usually, and will attack humans no matter what. But they drop some nice loot, which is always good. So, just remember to heal up and use a good weapon while fighting these guys, because they can prove to be a challenge." ~Shopkeeper Joe
Goblins often drop gold as well as any equipped items.