''LazyTown'' was created by Magnús Scheving, who also directed many of the TV program's episodes. The show is part live-action, part [[puppetry]] and part [[Computer-generated imagery|CGI animation]]. It was filmed and produced at 380 Studios, a purpose-built studio near Reykjavík equipped with high-end [[HDTV]] production facilities and one of the biggest green screens in the world. The production floor area is 1,800 square meters (almost 20,000 square feet).<ref>{{cite web|url=http://www.380studios.com/About.aspx|title=380 Studios – About Us|work=380studios.com}}</ref><ref>[http://www.lazytown.com/News.aspx?ID=76 "Icelandic Eurovision song‘s video 'Is it true' filmed in the LazyTown studios"]. Lazytown.com. 18 May 2009. Retrieved 29 August 2010.</ref> The budget for each episode was approximately ISK 70,000,000 (US$1 million), about five times the average cost for a children's television programme at the time, making it "the most expensive children's show in the world", according to Scheving.<ref name="action"/><ref>{{cite news | last = Moran | first = Caitlin | authorlink = Caitlin Moran | publisher = Times Online | title = Mr Motivator | url = http://women.timesonline.co.uk/tol/life_and_style/women/families/article623382.ece | accessdate = 19 April 2009 | location=London | date=4 November 2006}}</ref>

Its virtual sets were generated with an [[Unreal Engine 3]]-based framework, created by Raymond P. Le Gué, known as XRGen4. According to Le Gué, "We start with the live actors and puppets on a physical set with a green screen behind them as a backdrop. The green screen is replaced in real time with the sets created in XRGen4 using UE3. As we move the camera and actors around the physical set, the backdrop scene also moves in real time in complete synchronization with the movements of the real camera. All of this is recorded, and the director can watch the resulting composition in real time."<ref>[http://www.unreal.com/case-studies.php?ref=lazytown "Unreal Engine 3 Powers Critical and Commercial Success LazyTown"]. Unreal.com. Retrieved 8 February 2011.</ref>

Seasons 3 and 4 of ''LazyTown'' were filmed as usual in the LazyTown Studios in Iceland, but the special effects were created this time round by Turner Studios in Atlanta.<ref>[https://web.archive.org/web/20120901225849/http://www.lazytownworld.com/specials/season-3-press-release Season 3 Press Release]. Lazytownworld.com.</ref>

In most episodes, Sportacus, Stephanie Meanswell, and Robbie Rotten are the only characters played by live actors, though there are other live-action characters who occasionally appear. The rest of the characters are depicted as [[puppets]], made by the [[Neal Scanlan]] Studio and [[Guðmundur Þór Kárason|Wit Puppets]].