How does the graveyard work? When my villagers die, they just become skeletons on the ground and I can't move them.

That's a puzzle to be solved, and requires a certain level of technology. You have to go looking for it - the dead can't be buried the same way they are healed. Until you're able to bury your dead, you have to wait for them to decompose (which will occur within 24 hours).

so after they decompose will they become gravestones or just disappear?

No. To get gravestones you have to solve a puzzle!

You may look in the Forums List » The Guides » Virtual Villagers 1: A New Home Guide at:

Strategy Guide and Puzzle Hints or at:

*Detailed Puzzle Solutions - Major Spoilers!*