The Toclafane are a possible evolution of Humans that existed at the end of the universe. They evolved from a group of Humans stranded on a desolate planet at the end of the universe, with the Master hiding amongst them.
The Humans fled their desolate world in search of Utopia, where it was said there was sunlight and food and warmth. However, they never found this Utopia, the closest thing they could find was a planet with an atmosphere, but it was cold and dark and already populated with thousands of Humans. Slowly, they evolved away their physical forms, and with it went their personalities. They eventually ended up at heads in floating metal spheres, with childlike voices and sadisitic, brutal personalities.The Master stole the Doctor's TARDIS and brought the Toclafane to Earth in 2010 PLF, cannibalizing the TARDIS to work as a paradox machine, preventing Time from stopping thousands of Toclafane from invading Earth and slaughtering their ancestors. The Master turned Earth into a slave farm, using the entire population as a workforce to build massive bio-nuclear weapons to destroy the rest of the universe. His actions created a twisted alternate universe where everything is wrong.
The League deemed Earth to be unsafe, but it couldn't do anything about the situation there as it was having its own problems. Without the intervention of Spein against the Alpha-Centurians, they had managed to raze Inon II using a surprise attack. Worse still, this attack caused secret League data to be lost and this was found by the Covenant, which led them to Halo Installation 02. They activated it, annihilating themselves and a sizeable chunk of League-controlled space including the homeworlds of many of its military. Teetering on the brink, the League only just managed to hold its control over the Galaxy, only due to the intervention of the Faces.
Meanwhile, back on Earth, a year had passed since the Master's rise to power. With the Doctor aged and imprisoned, and his companions either ensalved or tortured into submission, the Master began to engage the final steps of his plan. Using a network of space stations to transmit a psycic fear across the human race, the Toclafane prepared for war. However, The Doctor was able to tune into this network and used the power of the combined human mind to shed the hundreds of years of age that the Master had added onto his body. He overpowered the Master and freed his companions, who preceeded to destroy the TARDIS.
With the paradox machine destroyed, The Pantheon of the League finally intervened. Time was reversed and the Toclafane themselves were wiped from existance, so they never existed at all. The League, Earth and the Humans all returned to normal, and no-one had any memory of these events, because they never happened.