1. if the tales are in the public domain, you can do what you want with them... just don't copy details of any that have been published and still have copyrights in effect... it's best to do some research and be sure you're on solid legal ground, before going ahead...
2. sorry to have to tell you it's virtually impossible to sell a children's book to traditional publishers with illustrations... they choose their own illustrators and only 'buy' the text ms... they will also do their own design and layout...
thus, while it IS 'common' for unknowing new writers to TRY to do this, they don't succeed... so, if you want to 'illustrate, design, and put together' your own book, your only chance to do so is to pay to have it printed...
some pods such as trafford, do deal in full-color, illustrated books, but the quality is usually only fair to extremely poor, and the retail cost per book so high, that few but family and friends would buy them...
plus, it will cost you quite a bunch of out-of-pocket money to do all the promotion, marketing, distribution yourself, AFTER you buy the books from them to resell...
sorry i don't have better news for you... email me if you'd like more details, as some of those i mentor have taken the pod route...
love and hugs, maia
maia3maia@hotmail.com