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The Valley of the Lost was a section of land separating the New World from the Old World. It was used by wizards during the Great War as the location for the Towers of Perdition. It was originally the homeland to the Baka Ban Mana, before they were driven off to make room for the Towers.
The purpose of the Valley of the Lost, besides from separating the New World from the Old World, was to keep the Dream Walkers from ever reaching the New World.
With the Baka Tau Mana, Richard Rahl was capable of disabling both towers with the aid of the Sword of Truth and the Baka Tau Mana spirit woman, Du Chaillu, therefore destroying the barrier that had turned the valley into a desert.