Can I Create Raggedy Ann or Peter Rabbit eBook?

Dear Rich: I want to make and sell an interactive ebook for iPads and tablets using Johnny Gruelle's Raggedy Ann Stories book and Raggedy Andy Stories book. The books were published in 1918 and 1920. I plan to use the original text and illustrations. The interactive part will include moving the characters in the scene, combining parts of one illustration with another, adding sounds, and adding new drawings to existing illustrations. For example, children would be able to touch Raggedy Ann to make her arm move or touch the sky to make snowflakes fall.  I also want to .... Also, what about Beatrix Potter's Tales of Peter Rabbit published in 1902? What if I made an interactive counting or alphabet ebook with new text but used the original illustrations or parts of the illustrations from the copyright expired books. However, there are trademarks on Raggedy Ann and Raggedy Andy and Peter Rabbit. Would that infringe on the trademark? We'd like to greenlight your projects, but we think the trademark owners of Raggedy Ann and Peter Rabbit take a very narrow view of what's in the public domain. If you go beyond what they consider tolerable -- for example creating derivative works -- they may try to roadblock your work. For example, Peter Rabbit's lawyers claimed in one case that a collection of public domain Peter Rabbit stories with various juxtaposed graphics violated the Peter Rabbit trademarks. Citing the overlapping powers of trademark and copyright a federal court ruled that Peter Rabbit's lawyers could go ahead with their lawsuit. 
Turf protection. There's a lot of money riding on the proposition that trademarks can protect these public domain franchises -- for example, Disney's proprietary approach to Cinderella, Pinocchio, Snow White, Little Red Riding Hood, Sleeping Beauty, and the Little Mermaid. Peter Rabbit's lawyers are internationally active and we assume the Hasbro and Simon & Schuster legal teams for Raggedy Ann (and BFF Andy) are also vigilant.
Bottom Line Dept. We don't want to discourage your use of public domain materials and we like your book ideas. We also think that there's some case law that supports your position -- for example, the Supreme Court prohibited the use of trademarks to create a "mutant" copyright regime and the high court also liberated titles of public domain works. There's simply no bright line test to determine when (or whether) fictional characters from public domain books can be used to limit public domain reproductions.  For that reason, proceed with care. As a general rule the further you stray from the original public domain publication, the more likely you are to trigger a cease and desist letter. And if you plan to proceed with your projects, include prominent disclaimers stating that the works are not associated with the various trademark owners.