Sheep are passive mobs found in the overworld, in almost every biome. They can range from white, to gray, to pink.The sheep can be given more colors if you dye their wool. When shorn, they will produce 1 to 3 blocks of the color of the wool they have. If killed, they will only drop 1 wool block.
To breed sheep, give them wheat, like any other passive mob. The offspring's wool color will be one of the parent's.