Hmm, okay Diddy Kong, I see where you're coming from. However, I still have a few more counter-points.
1) Before I really get into anything, look at thiese pictures:
Now try and tell me that Link from Smash Bros 64 didn't look like his OOT model.
Okay, now that that's out of my system...
2)I wouldn't say that Link in Melee was based more off of OOT than the Link from smash bros 64 was. Link in Melee was based off of OOT only because OOT was still the only 3D appearance of link to go on. I'd say that every Link from every smash bros so far has been representing all the Links from all the Legend of Zelda games. Similarly, I'd also say that when Zelda and Ganondorf were added, they weren't made in their OOT images because they were representing the game, but because thus far they hadn't yet made another 3D appearance to go off of. (Ganondorf is a slight exeption, as OOT was his first appearance, but I'd say that since he's continued to appear in Zelda games that it was more of an evolution of an existing character of Ganon, NOT the creation of a new one).
Sheik was added not for her own sake, but because she happens to be something Zelda can do, er... something she can be.
3) And you may be right, Sheik may not appear in another Zelda game, but is that any reason to cut her as a character? I say no.
Now, you suggested Midna (or anyone from TP) as a character. But can you really expect Midna to appear in another Zelda game after TP? Not really. No more than you would expect to see agahnim, or Ralph, or Skull Kid, or Veran, or any of those other characters who will only ever appear in one Zelda game. However, although Sheik is a part of this crowd, I'd say she has a few qualities that cause her to stand out from the rest of the pack, the most important of which is this: Sheik is Zelda.
4) Okay, THIS is why I believe Sheik was added. Zelda needs something to do. The appearance of Sheik was Zelda's first real step away from being the captive princess. In OOT you found out that she was useing her magic to disguise herself and actively fight against Ganondorfs rein. Now, I haven't played all of TP, but I'm assuming she does the same thing (fight against her captor, not becoming Sheik). Zelda's sheika disguise personifies her ability to fight against her captor. In it's in this respect that I believe that Sheik stands apart from the other one-shot characters.
5) Sheik has already appeared in smash bros and is already really popular. In this respect she's already a Nintendo all-star. Cutting her just to keep with the current games seems, well, odd and counter-intuitive when it comes to making a game with such high expectations as Brawl does. Just my opinion.
6) Okay, fine, I'll admit that Zamus seems Sheik like. But we haven't seen all that much of her, so you never know.