I love re-purposing the fabric because it's usually really soft and the wear and tear is often concentrated to the edges while there are still good pieces in the middle.
Here are some ideas that I've tried and some others too.
Old sheets are great for making garment protectors. Martha does a similar thing but my original inspiration came from my mom's coat closet where she covers her winter coats and furs. (I hate the fact that she wears fur btw. And she knows it...) with old sheets that she poked a hole in.
One of my favorite uses for old sheets is to make them into rags. Above you see the rags I quickly zig-zagged together when Wille was a baby. I used them to wipe his little face when drooling. 14 years later I use them for cleaning glass. Because they are so old and worn they don't shed fibers and are perfect for cleaning glass and mirrors.
See the little sausage on the shelf to the right? Also there's a similar sausage in the far right on the floor, just barely visible. Those are a sleeping bag and an igloo tent in their covers made from an old sheet. I guess what I'm trying to say is that sheets are a great way to cover things that you need to store. For two reasons. They are easy to toss in the laundry when they get dusty (and they do with us not camping very often) and also if you stick to a uniform color like I have here (white, surprise!) you get a uniform storage set without spending any money.
* Drop cloths when painting. Above I used the plastic sheets that came with a roller set I bought but in the past I've used old sheets. In fact I have a set in a plastic bin in the garage for that purpose. EDIT: Amanda, a reader, unfortunately learned the hard way that paint can soak through a sheet so take precaution and add double layers or if you are worried you'll drip a lot use a plastic like I did above.
* My mom used to always wrap the Christmas tree in an old sheet when taking it outside so as to prevent the needles to fall everywhere in the house.
* Sew some simple bags (or use old pillowcases!) and use as laundry bags and shoe bags in your suitcase when traveling.
* Cut holes for eyes and make ghost Halloween costumes.
* Cut into strips, braid and stitch together to make a rag rug.
* Cut a hole for the head, add a belt at waist and use as a painters poncho when doing messy crafts or DIY.
* Use the good pieces from a sheet and make pillow cases out of. I think half of our pillow cases are actually re-purposed sheets.
Basically you can use old sheets for whatever you use fabric yardage for, decorative pillow cases, shower curtains or even summer dresses for little girls.
If you're not fond of the pattern or color of your old sheets you can use them where they are not out in the open (like in a walk in closet as opposed to our under the stairs) or you can always dye them and if all else fails drop them off to be recycled and thus reused.
Have you made anything from an old sheet? Oh, I remember now that I've used some as makeshift curtains too, simply folding them over and clipping them to a curtain rod in my very first apartment in Älmhult.