Lands of Lore 2 is a nice game, but can be very frustrating.
One of these frustrations is the small inventory you have.
You can find so bloody many items, which items do you need to keep and which can you throw away?
After playing through the game these past days, I decided to create a list.

*mild spoiler alert*

- Skull Key, from Huline Village.
Used in Huline Village and Dracoid Ruins Palace.
(Dracoid Palace? Yes, there is one door which can be opened with that key, in the palace basement. Go figure. I failed to take the key with me, and I forgot what is behind this door. Actually, I can't remember if I ever opened it.)
Edit: I opened the door. There's a Lightning Gem and another Coco's Cap behind it. Yay...

- Wax, x2, from various locations, but mainly beehives in trees.
Used in Huline Ruins. (Give Dawn AND the Monk a copy, no need to choose.)

- Ivory Chip, x2, from Draracle's Museum, inside two hallway pots (smash 'm).
Used in City of Ancients. (All needed chips can be found in the city, but having some extra makes your life a lot easier. Trust me.)

- Silver Leaf, x1, from Dracoid Cemetery.
Used in City of Ancients. (You get a shot at getting a silver leaf in the city; failing that will leave you STUCK! Thanks for that one, devs. Save yourself the trouble and take one with you.)

- Mandrake Root, x1, from Dracoid Cemetery.
Used in City of Ancients. (To be honest, not necessarily needed. Used in a Goblet to gain access to a secret, which doesn't have any good loot.)

- Fire-based ranged weapon (Huline Temple, Noble Valkyrie Crossbow)
- Ice-based ranged weapon (Claw Mountains, Great Bow "Shard")
- Normal ranged weapon (City of Ancients, Dark Bow)
Used in City of Ancients and in the Laboratory.
Hanging on to these ranged weapons will remove the need to carry around fire and lightning crystals.

- Crystal Stalagmites, x3, from Draracle's Cave.
Used in Belial's Laboratory. (Used as keys. Not exactly needed, but the sooner you reach Belial, the better, so these help. The first item you find is a Crystal Stalagmite. Imagine that, carrying 3 of them around throughout the entire game, only to use them as keys in the final minutes of the game.)

- Greatsword Firestorm -> Greatsword Darkstorm (enchanted)
- Thohan's Greatsword -> Thohan's Greatsword (enchanted)
Belial's Laboratory.
(Enchant both of them in the Ruloi Citadel. Enchant them first, THEN take the Dreamstone. After enchantment, they can be used in the final battle, and make a far better choice than Belial's Horn, which is a slow-swinging piece of crap.
After enchantment, Thohan's the better of the two in my opinion, with its ridiculous fast swinging speed. If you found the Cobra figurine in the Dracoid Ruins, the room which will flood when you enter it, you'll swing even faster.

- Huline Jungle Larkhorn special note:
If you waste the Larkhorn Vapours (e.g. not using it on the Larkhorn), then you're also stuck.
Edit: Not entirely true: You can go back to the one who gave you the red potion and get another one. Not sure if you can get a new one from the other location if you chose the evil path.

Every other item in the game is either used on the same map or is expendable.
Please let me know if I missed any. :)

Protip: Use multiple savegames and save often, since you can set off traps in particular areas (*cough*damned ancient city*cough*) which you can survive but they'll be leaving you stuck.

I am not sure, but I think you have to give one wax impression to either Dawn or the monk to be able to progress with the story. So you could either miss Dawn's dampen spell or the monk's power orb. And when you are in the savage jungle, there's no turning back.
Again, I am not sure, maybe the game requires you to give wax impressions to both. I forgot.

Anyway, in my opinion the silver leaf is the most important. You can get stuck in the City of Ancients, which is bad.