Based on 1999's live-action movie, The Adventures of Elmo in Grouchland has players guiding the red Muppet on a quest to find his cherished blue blanket, which blew away from him in a sudden gust of wind. The eight-level adventure takes him from the bright and cheerful Sesame Street to the dark and filthy Grouchland as he runs, jumps, and swims his way past garbage cans, fire hydrants, worms, and insects called Pesties. Elmo also rides a mine cart during his journey, ducking and jumping to avoid obstacles that diminish his energy.

While a portion of Elmo's energy is depleted after making contact with certain objects, players can find stars hovering around each level to restore it. Catching a star also increases Elmo's score, with extra continues being earned for every 1,000 points collected. Two difficulty levels help determine the number of obstacles Elmo has to avoid as well as the rate of speed during some of the sequences. There are no passwords offered during the course of play, so children must rescue Elmo's blanket within a finite number of turns before the game ends.