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Driving his vintage 1930 Rolls-Royce, D. J. Mulrooney, a California lumber tycoon, takes his visiting grandchildren, Rodney and Elizabeth Winthrop, for a picnic in a forest of redwoods. While Rodney is eating, Elizabeth wanders off into the woods and meets Jasper, a 2-foot-high gnome, and his 943-year-old grandfather, Knobby. Against the warnings of the birds and animals, Jasper tells Elizabeth of his plight: because he cannot find a girl gnome to marry, the species is in danger of becoming extinct. Touched by his sad tale, Elizabeth gets Mulrooney to place his Rolls at the disposal of Jasper and Knobby, and they all go on a quest for other gnomes. Before they can make much progress, however, Jasper and Knobby are kidnaped by Horatio Quaxton, the crafty proprietor of the "Academy of Fantastic Freaks." And when Mulrooney orders his vice-president, Ralph Yarby, to organize a search party for the missing gnomes, the millionaire is carried off to a sanitarium. But Knobby escapes into the woods as Rodney and Elizabeth help free their grandfather and then rescue Jasper from Quaxton's clutches. After eluding attendants from the sanitarium during a wild chase over the mountains, the Rolls pulls into a glade where Knobby has contacted the gnome-king, 1100-year-old Rufus, as well as a bevy of beautiful gnome-maidens. A mating contest is held to see which one of the maidens can catch Jasper and hold on to him for a count of seven. To Jasper's delight the winner is the shy Violet. And, as Rufus marries the young couple, Mulrooney generously donates 50,000 acres of his land to the gnomes.