The Sheep lives in the Forest, Snow and Swamp biomes.
It gives you Raw Mutton and Wool when killed. Wool can also be obtained with the Shears.
You can use Fences and Gates to create a sheep pen. Buy the Rope from the Farmer or the Traveling Merchant and feed Wheat to the Sheep to lead the animal to the pen.
One can also be spawned using the Imported Sheep item.
The Sheep can be mated using Wheat. You need at least 2 Sheep to start breeding them. You can give them Wheat by hand or through the Feeding Trough.