The Discard Pile sits with the cards face-up between the Room deck and the Spell deck. Room and Spell cards are the only cards that go into the Discard Pile, Boss cards not used are set aside somewhere out of the player area and Hero cards are either in their decks, in Town, in a Dungeon, or the Bosses Soul or Wound pile. Item cards go next to your Souls pile. One is placed face-up (available to use), and the rest are placed face-down (these consist of any items that were used or items that were attached to heroes that survived your dungeon).
When a Room is destroyed or a Spell is used it is sent to the Discard Pile.