The Kingdom of Elfwood is a now-deserted magical elf realm located in the Enchanted Forest. It was filled with hollow tree-houses that were homes to very industrious elves. Elfwood specialized in the production and distribution of candy. It went into exile and became known as Elfwood-in-Exile in Dreamland in Elf Alley.
After the Elf King finds Elfo and Kissy in bed together, seemingly not for the first time, he sentences Elfo to death by hanging at the Gumdrop Tree. After Kissy cuts him down they run to the outer wall. Elfo pulls the lever and leaves Elfwood whereupon his adventures begin.
- According to Elfo, the elves of Elfwood make candy and are paid in candy too, something which he thinks "doesn't make any sense".
- He also says the workers all sing while they work which, he believes, is "not happiness" but "mental illness".
Elfwood is a magical land of candy, where gum drops grow on trees. It is a fantasy kingdom and rules of human logic do not apply. Many animals are found there including cats, birds, bunnies, squirrels, and turtles all of which are exaggeratedly cute and adorable. Many seem to work with the Elves, helping to make candy. One tortoise seems to have even been mutilated to make room in his shell for a baking tray. It seems, on the surface, to be peaceful and idyllic.
Despite the cutsie surface appearance and overly-happy way of life, there is a darker side to Elfwood: the Elf King is a tyrant and kills other elves on a regular basis. They use the Gumdrop Tree to hang elves from. Anyone who kisses or frolics with the Elf King's daughter Kissy is in danger of being arbitrarily killed at the King's command. Elfo escapes Elfwood due to his inability to reconcile what he sees as the mental illness and underlying threat of life in Elfwood. From his perspective, the customs of Elfwood are insane. Elfo's ability to see through the facade might be due to him being an elf-hybrid - that is, only 50% elf.
- It's a ha-ha-ha, and a hee-hee-hee,
- We're as happy as we can be!
- Elfwood is the place we'll never flee,
- Our minds are blank, but our hearts are free!
- We work all day, and we sing with glee,
- We drink all night uncontrollably!
- It's a ho-ho-ho, and a hee-hee-hee,
- Listen to us whistle adorably!