I see two types of replies:
1) It's obviously a result of a human banging a sheep.
2) A human and a sheep cannot cross-breed. The egg wouldn't get fertilized. (I'm guessing it could be done in a test tube, but the embryo would live for, what, a minute?) It has to be bullshit.
Here's a third one for you. A perfectly rational and logical explanation, that would actually allow for the story to be true:
3) A mutation caused the lamb to be born with a deformed head. Nothing strange about that. Things like that happen all the time. The article brings up five-legged calves! Mutations occur naturally, all the time. If a mutation causes a life-form to be unable to function, it simply dies. Usually this happens at the emryonic stage, but some mutations are in the gray zone between "nah, it's no biggie, you'll live" and "dude, you're fucked". Here we find "freaks" like the above-mentioned five-legged calf, people who are born with missing limbs, or other disabilities, like blindness; and creatures like this lamb, who are close enough to "normal" to be able to survive in the womb (or in an egg), but so screwed up that they die when born (or are unable to hatch, and die inside the egg). Freakshows have displayed the preserved corpses of such "freaks" for centuries.
By pure coincidence (not impossible, just fucking unlikely), the head of this deformed lamb happened to look like something we humans, who are "programmed" to recognize certain patterns, instinctively identify as a human head. There's nothing strange about that either. Hell, take a look at the moon! "Duuuuuh... A human must have banged a planet... What? I'm turning blue? D'oh! Forgot to breathe again..."