Sheets started on Opening Day 2008 in a 4–3 win over the Cubs. He batted eighth in the lineup, the first Brewers starting pitcher to bat in a position other than ninth. He also gave up Kosuke Fukudome's first major league hit in the bottom of the second. In his second start, Sheets threw only the second complete-game shutout of his career, beating the San Francisco Giants 7–0 in a five-hit, eight-strikeout performance.
On May 10, Sheets struck out St. Louis Cardinals' first baseman Albert Pujols on an 0–2 breaking ball in the first inning to reach 1,082 strikeouts, breaking Teddy Higuera's club mark. On July 9, Sheets had a season-high 11 strikeouts including the first 7 outs as strikeouts. By mid-July, he was 10–3 with a 2.85 ERA and was chosen as a starting pitcher for the National League in the 2008 All-Star Game. Pitching in his fourth All-Star Game, Sheets became the first Milwaukee Brewer pitcher to start an All-Star Game. It was also the first time that Sheets was in Yankee Stadium. In his 2008 All-Star outing, he pitched two scoreless innings, giving up one hit, walking two, and striking out three.
In October 2008, Sheets filed for free agency. Most teams were put off by Sheets due to his propensity for injuries. In addition, Sheets was a "type-A" free agent, meaning that if a team signed him before the Rule 4 draft, they would forfeit a draft pick to the Brewers. During the off-season, the New York Mets and the Texas Rangers expressed interest in signing Sheets. He had elbow surgery to repair the torn flexor tendon, and the Milwaukee Brewers were faced with the possibility of having to pick up the cost. After having elbow surgery he began rehabbing the elbow at TMI Sports Medicine in Arlington, Texas. The clinic is owned and operated by the Texas Rangers team doctor. While Sheets was not technically connected to the Texas Rangers, they did show interest in the offseason.