Temporary storage in Twilio Functions allows for the creation of resources locally for one-off activities, such as creating a file with user-provided data. This storage is located in the temporary folder under the underlying OS filesystem and is intended for single-invocation jobs only, as contents are deleted when associated containers are brought down. A Twilio Function example demonstrates how to access and utilize this temporary storage by writing to and retrieving from it, showcasing its potential for adapting to business needs.