Despite its subtle atmosphere, Twilight Town is one of the largest worlds known. It is located in between light and darkness, similar to Castle Oblivion and The World That Never Was. However, unlike them, due to those two worlds being closer to the darkness, Twilight Town exists in perfect balance between light and dark. Like its name implies, this world's sun is always in the same position in the sky.
Twilight Town is the birthplace of all human-form Nobodies, with possible exception of Naminé. When they are first "born", they arrive in front of the manor gates, in the clearing of the woods. Here, a previously born Nobody greets them and gives them their new name. Roxas at first turned down Xemnas's offer to join Organization XIII, and wandered the city streets. Seeing Roxas's apparent sadness over not having friends here after seeing a trio of friends (Hayner, Pence, and Olette), Axel appears and gives him Sea-salt ice cream, convincing him to join atop the Clock Tower.
Throughout Roxas's life as a Nobody, he, Axel, and Xion used the Clock Tower as a meeting place after their missions, where they would sit and talk about their missions, or discuss whatever came to mind. It is also here that Roxas and Xion have their final battle; it is also where he absorbs her afterwards.
Meanwhile, Sora, Donald, and Goofy accessed a memory-based Twilight Town via a card on the eleventh floor of Oblivion. Sora, vexed and confused, wondered why Vexen mentioned the words "my Riku" and "the other side of Sora's heart". After Sora defeated Vexen, Vexen was just about to reveal Marluxia's plans (and, by extension, Roxas's existence) to Sora and company when Axel barged in and killed Vexen.
At a later point, Riku, also in Castle Oblivion, accessed the memory version of Twilight Town with help from King Mickey. In the memory Twilight Town, Riku meets DiZ, fights Riku Replica in their second match ending with Riku defeating the Replica and causing him to fade out of existence, and meets Naminé before confronting Ansem, Seeker of Darkness one last time, to conquer his darkness.
DiZ, unknown to Organization XIII, began using the Old Mansion as a headquarters for his revenge. Along with Naminé and Riku, he set up computer systems and Memory Pods in the basement levels of the manor, and monitored Sora's progression as he regained his memories while Roxas lived in a virtual simulation of Twilight Town.
The restoration process finishes exactly one year from the day that Sora created Roxas, and Sora, Donald, and Goofy awaken from their sleep with their memories restored up to the point that they entered Castle Oblivion, but do not know how long they were asleep, or how they got to Twilight Town. Sora says that the surroundings are rather familiar, and the group wonders if they had ever been there before.
They wander the streets, looking for answers, and ultimately meet Hayner, Pence, Olette, Seifer, and the other residents of Twilight Town. Eventually, they encounter King Mickey, when he saves them from a group of attacking Nobodies and tells them to board a magic train to the Mysterious Tower. Once there, the tower's master, Yen Sid, gives Sora new clothes, new abilities, and explains the situation with Organization XIII. He also returns the Gummi Ship to them, and puts them on their new quest.
Sora and the party return to Twilight Town twice during their adventures. The first time, he learns that Kairi fled Destiny Islands in search of him and was kidnapped by Axel. As he leaves town, he is stopped by Saïx, who taunts him into defeating more Heartless for Organization XIII.
The second time, the party, along with Mickey, Hayner, Pence, and Olette, go to the manor where Sora and the party awakened, and find the digital Twilight Town, which leads them to The World That Never Was.