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Do all items in a characters inventory transfer, or just equipped items?

I'd imagine items stored in the vault won't (all my bows+2 and +arrows are in there) so I'll be getting those out before the transfer if the answer is 'all items in inventories transfer'

This question / problem has been solved by PetrusOctavianusimage
All items in characters' possessions will transfer.
Not sure about vault.
Vault won't.

Also note that bundled scrolls don't transfer, so your bundle of 10 scrolls with Delayed Blast Fireball is gone. Most other things transfer, though.
I didn't even know you could bundle scrolls in this game - you couldn't in the previous 2.

Only arrows, darts, and quarrels bundled for me before ........ anything else bundle besides scrolls?

Good god I could have made so many less trips to town
As far as I know, no.

There are a few bundled potions in Pool of Radiance, but you can't bundle potions that don't come pre-bundled.