Movie Date: June 22, 1979

The Muppets have gathered in a theatre to screen their new biographical film, The Muppet Movie.

As the film-within-a-film opens after the opening credits, Kermit the Frog enjoys a relaxing afternoon in a Florida swamp, strumming his banjo and singing "Rainbow Connection", when he is approached by Bernie, a Hollywood agent who encourages Kermit to pursue a career in show business. Inspired by the idea of "making millions of people happy", Kermit sets off on a cross-country trip to Los Angeles, but is soon pursued by entrepreneur Doc Hopper and his shy assistant Max in an attempt to convince Kermit to be the new spokesman of his struggling French-fried frog legs restaurant franchise, to Kermit's horror. As Kermit continues to refuse Doc's offers, Hopper resorts to increasingly vicious means of persuasion.

Meeting Fozzie Bear, who works as a hapless comedian in a sleazy bar, Kermit invites Fozzie to accompany him. The two set out in a 1951 Studebaker loaned to Fozzie by his hibernating uncle. The duo’s journey includes misadventures which introduce them to a variety of eccentric human and Muppet characters, including Dr. Teeth and The Electric Mayhem and their manager Scooter, who receives a copy of the script from the pair; Gonzo and his girlfriend Camilla the Chicken; Sweetums, who runs after them after they mistakenly think that he has turned them down; and the immediately love-stricken Miss Piggy.

While Kermit and Miss Piggy form a relationship over dinner that night, Doc Hopper and Max kidnap Miss Piggy to lure Kermit into a trap. Using an electronic cerebrectomy device, scientist Professor Krassman decides to brainwash Kermit in an attempt to force Kermit to perform in Doc’s commercials until an infuriated Miss Piggy knocks out Doc Hopper's henchmen and causes the scientist to be brainwashed by his own device. After receiving a job offer, however, she promptly abandons a devastated Kermit.

Having been joined by Rowlf the Dog and reunited with Miss Piggy, the Muppets continue their journey. Fozzie's 1946 Ford Woodie station wagon trade-in breaks down in the New Mexico desert. During a campfire that night, the group sadly considers that they may miss the audition tomorrow, and Kermit wanders off, ashamed of himself for seemingly bringing his friends on a fruitless journey. Upon consulting a more optimistic vision of himself, Kermit remembers that it was not just his friends' belief in the dream that brought them this far, but also his own faith in himself. Reinvigorated, he returns to camp to find that the Electric Mayhem and Scooter have read the script in advance, and arrived to help them the rest of the way.

Just as it seems they are finally on their way, the group is warned by Max that Doc Hopper has hired an assassin named Snake Walker to kill Kermit. Kermit decides he will not be hunted by a bully any longer and proposes a Western-style showdown in a nearby ghost town occupied by Dr. Bunsen Honeydew and his assistant Beaker, who invent materials that have yet to be tested. While confronting Hopper, Kermit explains his motivations, attempting to appeal to Hopper’s own hopes and dreams, but Hopper is unmoved and orders his henchmen to kill him and all his friends. They are saved only when one of Dr. Bunsen's inventions, "insta-grow" pills, temporarily turns Animal into a giant, causing Hopper and his men to flee.

The Muppets proceed to Hollywood, and after getting by his secretary, Miss Tracy, via causing her allergic reactions to their dander and fur, are hired by producer and studio executive Lew Lord. The Muppets attempt to make their first movie involving a surreal pastiche of their experiences. The first take goes awry when Gonzo, holding pastiche versions of the balloons he flew away on earlier, crashes into the rainbow, breaking it in half and sending it falling onto the rest of the set, bringing it down as well, then Crazy Harry pulls two levers in the control room, which overloads the electricity circuits and causes enough of an explosion to blow a hole in the roof of the studio. However, in their stunned silence of the whole chain of events, a rainbow suddenly shines through the hole into the studio right onto the Muppets. The Muppets, joined by the characters from The Muppet Show, Sesame Street, Emmet Otter's Jug-Band Christmas, and the "The Land of Gorch" segment of Saturday Night Live, sing the final verses of "Rainbow Connection". The film ends with Sweetums jumping through the theater's screen, having finally caught up with the other Muppets.

Big Bird was in the cameo talking to Fozzie Bear.