Present study was conducted in the hilly district of Bandipora of Jammu and Kashmir. The district was divided into low-lying (Sonawari), medium altitude (Bandipora) and High altitude (Gurez) regions. A total of 477 respondents were considered for the survey. Information on varied aspects of sheep economics was sought from the respondents (sheep rearers) based on a pre-tested questionnaire. The total annual expenditure for 19 ewes and followers under prevailing production system was Rs 75083.63 while it was Rs 153032.24, Rs 291480.5 for a sheep unit of 34 ewes and 1 ram, 63 ewes and 2 rams, respectively. Cost of feeding was the major cost component representing more than 70% of total expenditure. Profitability increased with increase in flock size. Under prevailing production system, a sheep unit consisting of 63 ewes and 2 rams was more profitable than sheep units with lower flock size. Net income/year and net income/animal/year was highest in Sonawari followed by Bandipora and least in Gurez region. Present study showed that annual returns on sheep production increase with increase in flock size and feeding expenses represent the single largest component of expenditure on sheep rearing. Further, a sheep unit of 60 above flock size is more or less sufficient to sustain a medium sized family under prevailing production system.