Elmo loves his fuzzy, well-worn blue blanket more than anything in the whole world. However, when Elmo's blanket gets sucked through a colorful, swirling tunnel into Grouchland, the yuckiest place on earth, Elmo goes on an adventure to Grouchland to retrieve his prized possession.

A scientific experiment unknowingly brings extraterrestrial life forms to the Earth through a laser beam. First is the cigar-smoking drake, Howard, from the duck's planet. A few kids try to keep him from the greedy scientists and help him back to his planet, but then a much less friendly being arrives through the beam...

When Gonzo's breakfast cereal tells him that he's the descendant of aliens from another planet, his attempts at extraterrestrial communication get him kidnapped by a secret government agency, prompting the Muppets to spring into action to rescue their friend.