In 1969, Joan Ganz Cooney and the team at the Children's Television Workshop asked Henson to work on Sesame Street, a visionary children's program for public television. Part of the show was set aside for a series of funny, colorful puppet characters living on the titular street. These included Grover, Oscar the Grouch, Bert and Ernie, Cookie Monster and Big Bird. Henson performed the characters of Ernie, game-show host Guy Smiley, and Kermit, who appeared as a roving television news reporter. It was around this time that a frill was added around Kermit's neck to make him more froglike. The collar was functional as well: it covered the joint where the Muppet's neck and body met.
At first, Henson's Muppets appeared separately from the realistic segments on the Street, but after a poor test-screening in Philadelphia, Pennsylvania, the show was revamped to integrate the two, placing much greater emphasis on Henson's work. Though Henson would often downplay his role in Sesame Street's success, Cooney frequently praised Jim's work and, in 1990, thePublic Broadcasting Service called him "the spark that ignited our fledgling broadcast service." The success of Sesame Street also allowed Henson to stop producing commercials. He later remembered that "it was a pleasure to get out of that world".
In addition to creating and performing Muppet characters, Henson was involved in producing various shows and animation insets during the first two seasons. During the first, Henson produced a series of counting films for the numbers 1 through 10, which always ended with a baker (voiced by Henson) falling down the stairs while carrying the featured number of desserts. For seasons two to seven, Henson worked on a variety of inserts for the numbers 2 through 12, in a number of different styles—including film ("Dollhouse", "Number Three Ball Film"), stop-motion ("King of Eight", "Queen of Six"), cut-out animation ("Eleven Cheer"), computer animation ("Nobody Counts To 10"). Jim Henson also directed the original C is For Cookie.
Concurrently with the first years of Sesame Street, Henson directed Tales from Muppetland, a short series of TV movie specials—in the form of comedic tellings of classic fairy tales—aimed at a young audience and hosted by Kermit the Frog. The series included Hey, Cinderella!, The Frog Prince, and The Muppet Musicians of Bremen.