Caves should form more realisticly. Limestone, chalk, dolomite, marble, rock salt, sandstone and gypsum can all be disolved over time with water, forming caves and sinkholes. As such, caves of all sizes should form in these areas commonly.
Many of those stones contain copper ore, many of them are fluxes and almost all of them have iron ore in mass. These are both places that the player would want to take over and places for goblins to set up camp in, for reasons shown in the rest of the post.
I would suggest that almost all of the caves have a goblin tribe instead of a bunch of animalmen fodder and big rats. Ones with copper ore would have copper weapons and armor, otherwise they would have crude wood spears, bows, flint axes and leather armour. Overall, this would result in much larger numbers of less well equiped goblins and more interesting caves. The semi-megabeasts can stay, as those are realy cool and serve an important use in adventure mode. I like the idea of an ettin lording over a mess of goblins.
Demons would still be in the game. They would take charge of a tribe, show them how to forge iron and lead their tribe into battle against other goblin tribes and other races. They would use slave labour to build the massive obsidian towers we have currently. The towers could be located anywhere with obsidian instead of just in mountains.
Because of the large number of goblins and the formation of elite squads with iron weapons that are chosen by the head demon for being extra nasty and evil, goblins would often have large, demon-led empires for the player to fight. This would make the political landscape much more interesting.
Goblins would be much more hated due to their agressive attacks on others. That seems to be where the game is going, so this would help get there sooner. Humans kingdoms should be more likely to ally with eachother against the goblin hordes for their well being. This sort of alliance makes for good stories, whether they work out or fail horridly. Elves and dwarves would be ok, they have much better weapons than most.
Demons should also get some interesting things. They could start cults in other race's civs that are near their empire's borders or have been conqured by the goblins. Evil cults are always fun, and it gives the player a legit reason to think up creative ways to execute dwarves. Perhaps cults summoning lesser demons from the pits once magic goes in. They could also give your dwarves Fell and Macabre moods and then order their some of their cultists to seize it or send an elite goblin squad to get it. The squad would announce the demand, then either you give it to them (and hopefuly leave you in peace) or refuse and they attack. Dark, evil artifacts make good plot elements.
Goblins who's demon wants a new tower, envies someone's metalcrafts/steel production, or just wants some human sacrifices should attack nearby civs to get slaves with the proper skills. They could also steal babies and try to teach them to forge. They could raid for more mundane reasons as well. Wanting a human's crops and food stocks, your ore or elven forests for the forges are all good. This also presents things like elven refugees asking for shelter in your fortress and the interesting options for dealing with them.
[ May 12, 2008: Message edited by: Grek ]