In several episodes, the babies say something like, "Where are we?" "We're in X's imagination." Somehow, they can see something they're not imagining but someone else is and take each other "into" someone else's imagination. For example, Gonzo once comments how it's interesting Animal always thinks in crayon. And the world the kids explore in that instance looks exactly as Animal imagines it, not how they would each imagine it, as you would expect if it was all in their heads. The dangers in all the fantasy sequences are treated as if they're real and need to be thwarted without merely imagining they're not there anymore or at least imagining a simple solution. Things happen none of the kids expect, or all the kids can see what one person "imagined." Plus, several individual instances point to the things the kids "imagine" really happening.
Kermit, obviously, is Kyon.
Skeeter died tragically between the events of Muppet Babies and The Muppet Show.
The Muppet Babies are all the kids she's adopted. She retired from acting and moved to the suburbs.
Disney is currently plotting to buy every single franchise/company that owns the copyright to all stock footage used in this show so they can make a fortune form the fans who have been pining for a dvd release for years.
They're off to a great start; they've already got the biggest one — Star Wars