Kingdom Hearts: Chain of Memories begins right where the first game left off, with Sora, Donald, and Goofy chasing Pluto across a grassy landscape. As the trio sleeps later that night, Sora is awoken by a strange presence. He finds himself at a crossroads, where he is suddenly confronted by a man in a black cloak, the same black cloak worn by the mysterious figure he encountered in Hollow Bastion during the previous journey. The man tells him that the road ahead has something he will need, but by finding it he will lose something dear to him. Meanwhile in a white room, a pair of hands is drawing a picture of a strange castle, a castle that Sora, Donald, and Goofy now find themselves arriving at.
The trio reluctantly enters the castle. As they find themselves in a white hallway, Donald and Goofy mention that they have a feeling that Mickey is in the castle, which Sora confirms he also feels. Jiminy pops out and says he got the same feeling, fearing that something must be wrong if they all felt the same thing. Before proceeding, they turn around to see the cloaked man from earlier, who shuts the front door. Donald tries to attack him with magic, but every spell fails. The man explains that, the moment they set foot in the castle, they forgot all their abilities. He gives them a cryptic message: "In this place, to find is to lose, and to lose is to find." He also reveals that the place is called Castle Oblivion, and he further explains that in the castle, they will meet people they know from the past. Sora tries to attack the man, but he dodges and rushes through Sora, much like the mysterious man from Hollow Bastion, and samples Sora's memories. He produces a card with an image of Traverse Town on it and gives it to Sora, telling him that it will allow him to enter a new world, before disappearing.
Sora uses the card on the big door at the end of the hallway, and he suddenly finds himself in Traverse Town. The cloaked man reappears and tells Sora that the world he sees is merely an illusion made from his memories. Jiminy points out that Donald and Goofy have disappeared, but the man tells him that he can use their strength if he masters the cards. He teaches Sora how to fight with cards, allowing Donald and Goofy to reunite with him. They realize that they are back in the outfits they were wearing before closing the Door to Darkness. The cloaked man tells Sora that he must go alone before disappearing.
Sora fights his way through some Heartless to the town square, reuniting with Donald and Goofy once more, before encountering Pluto. Goofy says that this makes sense, because they came to Traverse Town with Pluto, but Jiminy reminds them that they hadn't yet met Sora when they arrived. While trying to remember the exact order of events that led them to Castle Oblivion, they are met by a familiar face: Leon. Sora asks him how he got to Castle Oblivion, but he seems to think he is in the real Traverse Town. Not only that, but he seems not to remember Sora at all. Despite not knowing him, Leon remembers his name, confusing everyone. Yuffie shows up and tells Leon that Aerith sensed a strange power, which may be the cause of their distorted memories. Yuffie tells them that they should all go talk to Aerith.
The group makes their way to the house where Aerith is waiting for them. Sora reminds Leon of what he told him when they closed the Hollow Bastion Keyhole, which Leon seems to remember as well. Aerith theorizes that Sora's heart is connecting to theirs, allowing them to remember things they otherwise wouldn't know. Leon advises Sora to look around town to see if he can find his friends. They make their way to the Second District, where they meet up with Cid, who tells them that a giant Heartless show up when the bell rings. Soon enough, it rings, and the Guard Armor appears once again.
Sora defeats the Guard Armor, and he tells his friends that he probably won't find Riku and Mickey in the town. Leon tells Cid that Sora knows the true nature of their world, but even Sora begins to doubt what is real and what isn't. They all say farewell, but before Sora leaves, Aerith stops him. She points out that, even though she is supposed to be an illusion created from Sora's memories, she knows things an illusion shouldn't. She warns him not to fall for the illusions before Donald and Goofy interrupt him. Sora turns around to say goodbye to Aerith, but she has disappeared. Donald says that they didn't see Aerith, and from their view, Sora was just talking to himself. He ponders the nature of the illusion before leaving town.
After leaving Traverse Town, the trio finds themselves in a hallway identical to the one at the entrance of the castle. They are met by the cloaked man once again. They prepare to fight, but they are interrupted when another man appears. This man is wearing the same black cloak as the other one, but he has spiky red hair. The cloaked man allows the red-headed one to test Sora and leaves. The red-headed man introduces himself as Axel and attacks. Sora manages to hold his own, and Axel gives him another world card as a reward for proving his strength. He tells Sora that he's ready to venture further into the castle, and that he needs to trust his memories to find the most important person to him. Goofy asks Axel if he means Riku and Mickey, but Axel says he will have to give it more thought to remember who's really the most important person.
Axel tells Sora that his most important memories are buried deep within his heart, and that it will take some effort to truly remember. He offers Sora a hint, but the boy refuses, wanting to figure it out for himself. Axel warns Sora that if he discovers his buried memories, he may no longer be the same person he is now, and then he vanishes. As they proceed to the next floor, Jiminy tells Sora that Axel's warning worries him, but Sora says that there's no way he could become a different person. Goofy briefly forget Castle Oblivion's name before being reminded by Donald. Sora assures them that they can overcome anything together, and Goofy agrees, saying they will be able to stick together just like the last castle they went to. Goofy and Donald struggle to remember the name of Hollow Bastion, leaving Sora to wonder if they didn't just make it up. With their memories of their last journey in a haze, they continue their journey through Castle Oblivion...
