The Muppet Babies live in a large nursery watched over by Nanny, the only human character in the show. The babies have active imaginations, and often embark on adventures into imaginary worlds and perilous situations from which they are eventually returned to reality by some external event, such as Nanny coming to see what the noise was. They are constantly finding ways to entertain themselves in creative ways, and learning to work together to solve problems and survive their wild imagined adventures.
Each episode included a single storyline. Usually the babies were confronted with a child-like problem, such as fear of the dentist, or a question, such as 'where do muffins come from?' Other times, they were simply finding ways to amuse themselves with old toys or video tape equipment. The babies would then enter into their imaginations, transforming their toys into everything from time machines to pirate ships. Nearly every episode contained one song, and occasionally more than one.