I like applique as it's less stitching area to rub against their little chests I got some real nice ones on Adorable Applique, but it also depends what size design you want to use.. I know that doesn't help you much..
I agree. I do cover the inside with an iron on for babies, but the applique is less scratchy on delicate skin.
Oh, P.S. I don't have a problem with it wearing badly. Just don't use a "raw edge" applique if you are trying to avoid that.