What to do when I can't find sheep?

The best solution is to simply go for a walk and look for them. Bring a sword, food and wheat. I tend to find sheep in open stretches of a "plains" biome devoid of trees. I've also had decent success finding them on the side of hills, again, devoid of trees. They tend to flock in groups of 6 or so.

If you find any sheep simply hold the wheat in your hand and they will follow you around. Use this to corral them into a pen/holding area for future use or to find them again.

Another option is to load up a program like MCEdit and look around the world for entities (small red blocks), select them, analyze (to ensure you have sheep or not other mobs or dropped items), then copy and paste. Not quite as easy as it sounds but can sometimes help.

You can encourage passive mobs like Sheep to spawn by creating a large, flat grassy area. They only spawn on grass blocks, so having a big, open, flat grass field gives you more chances.

Relevant wiki pages:

Sheep

Grass

I had this problem when I first started playing - couldn't figure out how to make bread so just killed everything nearby and ate it. Didn't realise they wouldn't respawn.

Ended up just heading into the next chunk, building a large enclosed area and luring that chunk's sheep into it. Once there it was easy to breed them.

If you can't find sheep for wool (I'm assuming) you can always kill spiders and craft their string into wool.

http://www.minecraftwiki.net/wiki/String

You can always go to another chunk, and just keep running around with wheat until sheep, pigs, cows, chickens, etc start to follow but if you're scared to get lost, put lamps down where your trail is, and we getting animals to follow you, you have to keep turning around and making sure they are still following or make sure they see the wool, it's better to just walk backwards watching them the entire way.

You could move into a village if you find one. Make sure there is a black smith house with some good stuff. Villages are usually located near sheep.