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The Dream World (幻夢界 genmukai) is an intermediary world that appears on stage 3 of both Story of Eastern Wonderland and Lotus Land Story. This area is home to many strange creatures, including the stage 3 midbosses from SoEW and LLS as well as the Five Magic Stones (3rd stage boss) from SoEW
In Touhou 2 (SoEW), Reimu passes through this area to Reimaden only to meet the boss of the area, the Five Magic Stones. The area had a very dark background with many stars and rocky walls on both sides of the screen.
In Touhou 4 (LLS), Reimu and Marisa pass through this area to get to Mugenkan only to meet Elly and Yuuka Kazami. The Dream world changed slightly from the previous game. Now it has a more reddish tone and a rocky background, turning black in the middle. Later in the stage it turns black with multicolored stars with two floating blue tile formations.
It's important to note that the location named Dream World in both Story of Eastern Wonderland and Lotus Land Story may be different. Since both refer to the same name however, it is assumed they are the same location. Genji makes mention that this world is between their world (Gensokyo) and Makai but it is never clear as to whether or not the later stages in SoEW take place in Makai. Mugetsu states that the Dream World is her creation in the extra stage of LLS.