Q.: Can I do an e-book like a slide show or flip book with my text embedded in the pictures and can we add music?
Answer: No. According to Smashwords, all text has to be set so that it can "reflow", so text is not allowed to be embedded within artwork and .wav-type files also can't be embedded in the books.
Apple's position is that e-books with text embedded in artwork will be rejected.
A slide show or animated flip book is really a different medium than an e-book—just as paperback books and movies are two different mediums. For some this new e-reader technology, especially the iPad, may seem to be blurring the lines between the two, but a book is still a book and video is still a video. The latter has to be submitted through a different source than an e-book distributor.
Q.: Can I do any kind of illustrated book for children?
Answer: Yes, as long as the text is set apart from the illustrations and not embedded. I've formatted many of these books and usually the artwork is placed above or below the text it's meant to illustrate. Keep in mind that all interior artwork has to be sized to certain specifications.