mmmm..... We also use flannelette sheets for DS in winter - and they are 100% cotton so they breathe. As long as you wash them before use there shouldn't be an issue with breathing in dyes etc. The top sheet is a waste of time IMO anyway as all DS's sheets & rugs end up kicked off, so we just put him in a sleeping bag with flannelette as the bottom sheet. Perhaps you can contact the manufacturer to ask them why the warning?