While browsing the library, Elmo returns to the street with several books, including one called Once Upon a Monster. Cookie Monster has fond memories of the book and they both enter it magically. Inside, they find that not everything is as great as Cookie remembered and help all the monsters in the story with their problems. The levels in the game are defined as chapters in the book.
Chapter One: "The Greatest Party There Ever Wasn't"
Cookie and Elmo discover Marco's birthday party, which consists of only himself. Elmo and Marco go off to get supplies, while Cookie Monster goes for food. Elmo and Marco collect streamers in the Electric Jungle, discovering a hole to a secret cove. In the cove, the two help Seamus, and even Marco, pick out an outfit to wear for the party. Meanwhile, Cookie and Grover use the leaves of the Tree of Plenty to fly up said tree and collect fruit. They then run into Tallulah and help her make a birthday song. All the monsters come together for the party, where they share cake and dance.
Chapter Two: "From Seed to Sky"
Shelby's garden has fallen into disarray, polluted with weeds, mud and trash, which pleases a visiting Oscar the Grouch. He begrudgingly agrees to help clean, collecting balls of trash. Once the weeds are plucked, Slimey helps by creating spots to plant new flowers. The monsters then dance to help her flowers grow. They help bloom flowers along a tall vine with the help of some bee costumes. At the top, they find Shelby's singing plants, who are in need of a tune-up. The monsters raise and lower the flowers until they reach their perfect note. Now that the garden's complete, Elmo and Cookie marvel at its wonder, while Oscar takes Slimey back home to play with his new trash.
Chapter Three: "Seamus the Brave"
Seamus' is known for his plays, but his latest work needs more help, but he's too shy to ask. Cookie offers his and their friends' help and becomes the director of his new play, The Emperor's New Clothes 2: The Emperor Talks Back. Following an acting warm-up, Cookie gets inspired and adds a flower chorus to the show. In the play, the Emperor has a speech to give and has a new outfit for it. As he walks, he gives up his outfit, piece by piece, to new friends he meets along the way. By the time he gets to the speech room, he has no clothes, but has learned they aren't important - his compassion is. Seamus has gained some confidence thanks to his friends, and Cookie calls for 5 more rehearsals before opening night.
Chapter Four: "To Have and to Hug"
Elmo and Cookie visit the woods, when they are trampled by a stampede of Puffalopes, cute and happy creatures. The Puffalopes are fleeing from monster Grrhoof, who appears frightening to them, having covered himself with dirt and twigs to appear like them and get them to like him. They clean him off and notice the Puffalopes aren't running away in fear now, but are still shy. They throw the creatures some Puffalope biscuits, bringing them out of hiding. Now that Grrhoof are the Puffalopes are friends, they bring the monsters to their home - Shangriloff, where they dance and Cookie earns himself a Puffalope biscuit.
Chapter Five: "The Sound and the Furry"
Tallulah has a band now, featuring the Doo Rays, who need to be woken up to start practice. However, the rambunctious monsters flee the scene and hop down from the tree, with Elmo and Cookie in hot pursuit. The Rays land in a mud puddle and are cleaned off by the two. The Rays run off again, making their way to Seamus' lair, where he outfits them with band uniforms. Tallulah arrives in uniform too and leads them all in a musical march through the woods.
Chapter Six: "Like a Monster in the Sky"
All the monsters gather by storyteller Ramona's usually storytelling spot, but now she's far off in the distance and nothing happens. The monsters grab their sleds and head over. They find Ramona and ask for a story, but she has run out of ideas. Elmo and Cookie offer to help inspire her by telling stories of their adventures to her. As they re-enact their stories, Ramona magically makes elements from the stories appear as constellations in the sky. Ramona is inspired and has a story of her own, asking help from her friends to narrate. Following the story, the monsters do all the dances from every story, then lay down to gaze at the stars.