I press the sword button just before the key and then try to press right to get the key and I just get beeping sound and skeleton heads kill me.
I also tried to get to the end of the game without picking up the key, seems you must collect 100% of treasures.

And I'm quite sure you must press right arrow, I also checked the walkthrough:
https://gamefaqs.gamespot.com/pc/576296-dragons-lair-ii-time-warp/faqs/26781
SWORD
then RIGHT to grab the KEY.

And a lot of times key presses stop to register and I lose 2-3 lives to get them working again.

And there's no checkpoints, I think only first level has 2 checkpoints.
At least you don't have to go from beginning of the game if you lose those 5 lives, you start from beginning of current level.
Another problem is Alt+Tab, it goes to main menu instead to desktop.

First game was not much of a problem, but these treasures in second game sure make it a lot harder, especially when the game is bugged, at least I think it's bugged.

I also have DVD games, but there's no yellow arrows there and that is way too hard for me.

Solved it, this works:
http://www.daphne-emu.com/site3/index_hi.php
[url=https://www.daphne-emu.com:9443/phpBB2]https://www.daphne-emu.com:9443/phpBB2[/url]/ ... f=5&t=2387

I couldn't get it to work with DVD player programs, in menu arrows work, but not in game. Maybe I will try it on a real DVD player.

Forget this GOG release, it's bugged too much.

So your solution is to hunt down the DVD versions that will work with Daphne and play it from there? I don't think most people would prefer that alternative. I have the original DVD versions and can play them just fine on my computer. I also use Daphne. But I wouldn't recommend that as an alternative for most people. They're not HD and most people would have a hard time getting them to work. Personally I recommend getting them from Steam. They work a lot better than the GOG versions

Thanks, I finally beat the game, I played the Steam version.

+ Alt+Tab works now
- a few times some kind of lag happens, yellow arrows don't show up right away, but I didn't lose any lives because of this and lag stops quickly, it's not like GOG version where it stops registering keys and you lose several lives

I also write this first, but now I see GOG version also has it:
+ you can continue the game at the beginning of current level with all the picked up treasures even if you close the game

Also, I actually managed to pick up the key in GOG version, I just kept right button pressed down and I died, but I got the key even though no animation. But there's probably more bugs like this.

Do you or anyone else perhaps know which versions are these?
https://www.youtube.com/watch?v=HzCJ5XInUqA
https://www.youtube.com/watch?v=tWXtBTTpcHk (I see it's not remastered)

The 1st version is one that you could buy and download through Amazon.com. Unfortunately it's no longer available. The 2nd one is the DVD version that you can use with Daphne. You can tell because the screen has a yellow'ish tint that drove me nuts. Luckily in later releases, it was fixed

The Steam versions seem to work fine. Space Ace has bugs where you can't get some achievements, but there is a guide for getting Steam to download a previous version that works.

The Steam versions are easier to play compared to Daphne. You actually have on screen prompts so you can see where you mess up.