He scored his first goal of the season against Reading at the Stadium of Light in a 2–1 victory for Sunderland, scoring again in a 3–2 loss to Arsenal scoring the first ever goal for Sunderland at their first ever game at the Emirates Stadium. Despite his impressive season, Roy Keane stated he would consider offers for Wallace. Wallace was linked with a MLS side Toronto want to sign him but talks never materialised. On 18 January 2008 it was reported that Wallace had sustained an Anterior Cruciate Ligament knee injury and would therefore miss the rest of the 2007–08 football season. But in an unexpected turn of events, Wallace made his return on the final game of the season in a 1–0 loss against Arsenal.
In the 2008 summer transfer window, it was announced that Wallace had rejected an offer from Preston North End, so that he could fight for his place in the Sunderland squad. However, due to the summer signings at Sunderland, Keane told Wallace that he was even further down the pecking order and unlikely to get many games next season. Wallace signed a year-long loan at Preston with a view to a permanent deal at the end of the season. After being an un-used substitute two times, Wallace finally made his debut, coming on for Barry Nicholson, in a 1–1 draw against Sheffield Wednesday on 23 August 2008. He scored his first goal two months later in a 2–0 win over Watford. At Preston, Wallace soon became a fan favourite, due to the number of times he provided excellent crosses, mainly for Jon Parkin. Wallace signed a permanent four-and-a-half-year contract with Preston on 12 January 2009. In his first season, Wallace made 39 appearances, scoring five times along with nineteen assists.