Terra, Aqua, and Ven's adventures ultimately lead them to the Keyblade Graveyard, a barren wasteland where the Keyblade War was said to have occurred. While they each arrive separately, they all share the same goal: to settle things once and for all with Xehanort and Vanitas.
The three friends reunite at a crossroads, where Terra confesses to Aqua that he was responsible for the death of Master Eraqus thanks to Xehanort's machinations. However, as he is aware of Xehanort's role in all this, Terra intends to atone for all he has done. Ventus, meanwhile, is aware of his role to forge the χ-blade with Vanitas, and asks his friends that in the event that he has to forge the χ-blade, they will be the ones to "put an end to [him]." But Aqua and Terra have no time to ponder Ven's request: Xehanort and Vanitas have arrived.
Xehanort explains that the Keyblade Graveyard was the site of the Keyblade War, and expresses determination in finally finding the supposed source of it: the χ-blade. A legendary fight occurs, featuring twisters of Keyblades, displays of magic, and clashes between the heroes and villains. In the process, Xehanort freezes Ven and summons Kingdom Hearts in the sky.
As Aqua tends to Ven, Xehanort's co-conspirator Braig arrives, now displaying Xehanort's tell-tale golden eyes and pointed ears. Though Braig taunts the two, Aqua battles Braig in an attempt to protect Ven. After Braig's defeat, he flees the fight, explaining that he only needed to buy time for Xehanort. Vanitas swoops down and then knocks out Aqua, enraging Ven enough to thaw out of the ice and battle Vanitas. But as Vanitas sheds his mask, he reveals that now, it is time to forge the χ-blade. He reveals that he is the originator of the Unversed, and specifically spread them across the worlds to make Ven strong enough for the fated clash, before merging with Ven.
Meanwhile, Terra, enraged at all that Xehanort has done, battles the elderly master in an effort to protect his friends. Just then, as the χ-blade is forged, Xehanort sees it as the new moment to possess Terra. Terra attempts to activate his armor to save himself, but it is too late: Xehanort possesses Terra's body, declaring him to be a part of the darkness. But Terra's will is so strong, it animates his armor enough to strike back at Xehanort.
Aqua awakens to find Mickey beside her. She notices Ven, but it's not him- it's Vanitas, and he's forged the χ-blade and intends to use it to reignite the Keyblade War. Upset, Aqua and Mickey fight Vanitas to destroy the χ-blade and save Ven. Meanwhile, Ventus finds himself in his own Dive to the Heart, where Vanitas reveals that their union was not quite finished and offers to truly forge the χ-blade together. Ven, however, refuses and battles Vanitas for his friends, even though destroying the χ-blade will also destroy his heart.
During the fight, Vanitas forces a D-Link on Ven, but Ven turns Vanitas's attacks against him and eventually destroys him and the χ-blade at the cost of his own heart. At the same time, in the real world, Vanitas nearly corners Aqua, but she uses her bonds to destroy the χ-blade, freeing Ven. However, the χ-blade's destruction creates an explosion of light, sending Aqua and Ven's unconscious bodies to the Lanes Between. Mickey manages to save them and take them to the Mysterious Tower, where Yen Sid explains that Ven has lost his heart and needs to be hidden somewhere...
Elsewhere, Terra's Lingering Will has defeated Xehanort. As the χ-blade is destroyed, the explosion of light engulfs Xehanort, sending him to another place. The clouds that covered Kingdom Hearts engulf it once again, leaving the Lingering Will alone.