When my grandfather passed away (9 years ago today in fact) we donated a lot of his war memorabilia (he saved EVERYTHING so we had uniforms, medals, letters from home, log-books from flights, maps etc.) to a local military memorial/museum.
I think he would have thought it was very cool to have his things in a museum where they could be put on display for years to come. WWII was the defining event of his life and he was very proud of his service and loved to talk about it.
I would find a local preservation society as well. These items are very important to some people. In 2004 DH and I went to Normandy for the 60th anniversary of D-Day. There were thousands of people (french, german, british) who were wearing authentic items WWII uniforms.
My husband is a collector of WWII memorabilia. He is always looking for stuff like that on eBay and at local antique stores. You could try to sell it to a collector or you could donate. I guess which you choose would depend on what you are comfortable with. Here is a non-profit charity group that accepts such donations:
I called our local VA earlier and they said they'd love to have it for their mini-museum. I took it by there about an hour ago and the man I spoke with was so grateful. He said most people would just throw something like that out, but he appreciated me taking the time to think about them. Made me feel good.
As far as keeping it, we just don't have a lot of space in our house, especially with a baby on the way. I hate keeping stuff that just sits there and collects dust for the most part so we figured we'd let someone have it who'd appreciate it more than we would.
I just wanted to pop in and say thank you for donating the memorabilia. My grandfather was in the 82nd airborne during WWII and I'm a veteran myself. It breaks my heart when I see people dispose of things such as what you donated. Many people died wearing the uniform and to protect our flag and all that it stands for. Most men were barely that when they enlisted. I am so grateful to the WWII generation. They truly are/were the greatest generation. At least a part of your DH's grandfather will live on.
Good Luck with your new baby!!