The traditional towns of the Kathmandu Valley are ingrained with varying cultural forms of different historical periods. But the paucity of documented literature and the evident difficulties conducting archaeological work on the existing settlements leave significant gaps in the knowledge of ancient and medieval towns of the Valley. This paper, through the morphological analysis of neighborhood units, known as toles, and their ritual artifacts, of one of the Valley towns—Thimi—attempts to discover the different historical layers of the settlement. In particular, the study finds that the territorial structure of the tole and its ritual artifacts such as the shrine of Ganesa, which is the symbol of a neighborhood locality, and the crossroad spirit, known as chwasa show a regular pattern in their location within the neighborhood quarter, and their distribution in the settlement. They are also found to be closely related to the settlement structure as defined by the neighborhood blocks and the street patterns. Following the morphological analysis, the study then reconstructs four historical phases, and suggests that the development of the town was regulated by the royal court. Further, through the case study of the three neighborhood units, the paper shows that toles constituted basic urban units—a transition level to the town settlement that differed from the lower level structure of the clan settlement unit.