Sora, Donald, and Goofy find themselves on a pier of a beautiful, white town, which is but one of many islands on a great ocean. Knowing this is the point of no return, the trio makes certain that they are ready for what lies ahead, and leave the pier for the town.
As they look around, they spot Master Xehanort strolling nearby. However, when they try to confront him, a second Master Xehanort pops up nearby. And then another. The visions of Master Xehanort transform into mysterious armored avatars of the Thirteen Seekers of Darkness, each bearing the weapon of a fallen Seeker. Sora, Donald, and Goofy come under assault by all twelve facsimiles, but are able to fend them off. Master Xehanort is surprised that he has been transported to his boyhood training grounds, a nexus from which all worlds are said to come from - Scala ad Caelum. Master Xehanort then absorbs each of his fallen avatars and conjures a demonic goat-resembling armor to battle the trio with. But first, he uses his arcane magic to change the very layout of the world, boxing in the trio with him for their fight. The fight takes them from land, to the sea beneath the town where some familiar ruins lay, and to the skies above the town once again.
Master Xehanort soon flees up the highest tower of the town's dominant castle, with the trio in hot pursuit. Challenged one last time, Master Xehanort chides Sora for thinking he could contain him here, and summons Kingdom Hearts and the χ-blade on the spot.
- Master Xehanort: There is one sky, one destiny!
The battle that follows is ferocious as Master Xehanort, imbued with the power of Kingdom Hearts, viciously gives Sora, Donald, and Goofy the fight of their lives. At one point he even steals Sora's light from him, forcing Sora to beat it back out of him. When Master Xehanort is on the brink of defeat, Sora tries one last move to stop him, but Master Xehanort nonchalantly brushes it off and strikes Sora down.
As Sora's soul once again lies on the brink of death, he hears two familiar voices crying out for him - Donald Duck and Goofy, the two best friends who he began his journey with so long ago, now determined to make sure he finishes the journey with them. Sora is revived by the love from his friends, and as they make their final stand, the power of their trinity, their bonds, is enough to overpower even the χ-blade, defeating Master Xehanort once and for all.
The old Keyblade Master, gravely wounded, refuses to surrender as Kingdom Hearts ominously pulses in the sky behind him. Master Xehanort explains his true goal is to purge the World and start anew with a blank canvass, in which he can rule as the World's leader and guide them away from the corruption of both light and dark. Sora refuses to accept this, and Master Xehanort is reminded of an old friend. At that moment, the Guardians of Light arrive, having followed their hearts to Scala ad Caelum. Terra faces down the man who destroyed his life, and informs him there's more to light than meets the eye, as he told him.
Master Xehanort can only muse at what a sly fox his old friend is, as Eraqus's soul emerges from Terra's heart, and orders him to stand down. Master Xehanort insists he can carry on, but Eraqus's words eventually ring true. As Xehanort remembers their boyhood in which they vowed to always be there for each other, he relents. Xehanort approaches Sora - the "dull, ordinary boy" who had proved his better time and time again - and gifts him the χ-blade, congratulating him and passing the torch of Master to him.
Eraqus turns to Terra, Aqua, and Ven, and profusely apologizes for all the trouble he gave him, and asks Terra to look after the other two for him. A distance away, Master Xehanort is all alone in the shadows, watching enviously, until he nearly collapses, his wounds taking their toll. Eraqus goes to catch him, and asks if he is ready. Xehanort genuinely smiles and agrees, and the two take on their youthful, innocent forms as they pass away, joining Kingdom Hearts. Sora gathers the others around, and uses the χ-blade to seal away Kingdom Hearts once again.
Everyone returns to the Keyblade Graveyard, and though Mickey declares victory, Sora disagrees, lamenting that once again, Kairi has been lost to him, and decides to use the Power of Waking to bring her back. Mickey vehemently disagrees, warning Sora that he may never come home even if he does find Kairi, but Riku convinces him to let Sora go it alone.
Mickey, Donald, Goofy, and Jiminy return to Disney Castle, where the former two are happily reunited with Queen Minnie and Daisy. Yen Sid, Chip, and Dale join them, and the group watches happily as fireworks go off to celebrate their victory.
At the Land of Departure, Aqua, Ven, and Terra pay their respects at a grave for Eraqus marked by his ancient Keyblade. As they leave, Chirithy appears to Ven, and though it shies away at first, Ven recognizes his old friend and happily shares an embrace.
At Twilight Town, Lea, Roxas, and Xion have all changed into comfortable attire to watch the sunset again from the clock tower. The group is then offered ice cream by none other than Isa, now recompleted and having repented for his past sins. The group is then joined by Hayner, Pence, and Olette, and Roxas is briefly distracted by a cloud that passes over him as they all become one big group of friends.
At Radiant Garden, Ansem the Wise has retaken command of his old world, and is putting the finishing touches on Namine's new Replica body with Ienzo and Even. Once Namine awakens, she is escorted outside by Aeleus and Dilan, where she is welcomed aboard the Gummi ship by Riku.
Some time later, Mickey, Donald, Goofy, Riku, Namine, Xion, Roxas, Lea, Terra, Aqua, Ven, Isa, Hayner, Pence, and Olette are enjoying a beach party at the Destiny Islands. Everyone looks up to notice Sora sitting with Kairi. Sora squeezes Kairi's hand as Kairi sheds a tear... and Sora fades away, leaving Kairi alone.
Meanwhile, the No Name Keyblade, its wielder now dead, is reclaimed by Luxu, who relishes finally having it back where it belongs. He is met by the Foretellers minus Ava, who have traveled to the present and are confused by Luxu's appearance. Luxu removes his hood... revealing himself to be Xigbar, the latest in a lengthy list of vessels he had to adopt in order to watch over the Keyblade over the countless years. The Black Box by his side, Xigbar begins to explain what his role was to his comrades, as Maleficent and Pete watch from afar.
In the past, with the game against Xehanort concluded, Eraqus sets up a new game in which his sole light piece faces off with seven black pieces, each piece resembling the Foretellers and the Master of Masters...
- He will return...