Sheep is a combination strategy and puzzle game, featuring light elements of war or battle simulations, built around a wacky story in which space-faring alien explorers from millennia ago devolve into domesticated sheep on Earth. Now their ancestors are trying to round them up by secretly enlisting the aid of two humans (Bo Peep and Adam Half Pint) and two animals (a sheepdog and a pet) through subliminal mind control. Players take the role of the Earthly "herders" to lead the flocks through six worlds with multiple levels, eventually reaching special rendezvous point where they'll be loaded onto UFOs for the trip back to their home world of Ovis Aries. No direct control is exerted on the sheep so players must manipulate objects and obstacles, as well as rely on the strengths of each herder, to accomplish the tasks. Levels have time limits and a minimum number of sheep to be saved from each flock.

The basic premise of this game is that sheep were once intelligent beings from the planet Ovis Aries. These smart sheep sent a group of their species to Earth millions of years ago to learn about Earth's society and customs. Unfortunately their ship was damaged on the trip which left them stuck on planet Earth. As the years passed they forgot their mission, they soon became domesticated by mankind. Now their ancestors have come back to Earth to regain the lost sheep and stop the evil plan of mad scientist Mr. Pear. In order to keep their presence unknown they abduct 2 humans (Adam Halfpint and BoPeep) and 2 dogs (Motley and Shep) and implant them with the desire and will to herd sheep like mad men. The goal of the herders is to herd as many sheep as possible back to Mount Mouflon and return them to the sheep paradise of Blue Hawaii.