After you find Hercules, you explore the place a bit, and see him on, level 4 I believe, but it could be an earlier one so explore thouroughly.
You see him and he shuns help, but follow him more and he battles you. Once you beat him he joins the party.
It is great, it's definitely my favourite Kingdom Hearts game (followed by KH2). I just finished Radient Garden with Terra. If you wan't to know about Xigbar's scars, it's because Terra shot Braig's face with darkness (probably the most violent scene in KH).