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I figure someone deserves some rep for answering these questions:

1)Is this a game where I need to hang onto all the books/notes from the Mortuary to advance?

2)Do dropped items decay or may I pick them back up later?
This question / problem has been solved by Namurimage
1) Not really, no. But if you are not sure about some items you can store them someplace.

2) Dropped on the ground they'll decay after a while. You can however use containers to keep them save. I use the containers in a house in Ragpicker's Square to store stuff i want to keep but don't want to carry around all the time.
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Namur: 1) Not really, no. But if you are not sure about some items you can store them someplace.

2) Dropped on the ground they'll decay after a while. You can however use containers to keep them save. I use the containers in a house in Ragpicker's Square to store stuff i want to keep but don't want to carry around all the time.
Ding, ding, ding! We have a winner!!!

Thank you, Namur.
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KickingSquid: Thank you, Namur.
You're welcome ;)
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Namur: 1) Not really, no. But if you are not sure about some items you can store them someplace.

2) Dropped on the ground they'll decay after a while. You can however use containers to keep them save. I use the containers in a house in Ragpicker's Square to store stuff i want to keep but don't want to carry around all the time.
If only I knew of this during my playthrough, oh well I'm going to start a new game anyway so this will come in handy!