Kakashi uses his sharingan to mirror Hoshigaki's water technique and then turns his attention to Itachi. Why are they there?
Meanwhile, Jiraiya invites Naruto on an adventure to find Tsunade. Naruto reacts skeptically, so Jiraiya teases him by offering to take Sasuke instead. And, he'll teach Sasuke a more powerful technique than chidori. Of course, Naruto's interest peaks and he excitedly volunteers to come along.
Kakashi knows that Hoshigaki is one of the Seven Shinobi-gatana of the Mist and he carries a large blade. He had heard that Zabuza had fought them. Itachi's not amused and reminds Hoshigaki that they didn't come here to fight but to find something. Sensing that these three jounin are not going to allow them to tend to their business, Itachi pulls out some shuriken as Kakashi does Ninpou Suiton Suijinheki (Water Wall). Itachi counters, using the shurikan in his right hand as a decoy and performing water seals with the other.
Kakashi then warns the others that Itachi is quite powerful. He was an Anbu squad leader at 13! Itachi is amused that Kakashi can use the sharingan, but because he's not of Uchiha blood, he can't control it as well. Kakashi warns Asuma and Kurenai not to look into Itachi's eyes. Only another sharingan can. But Itachi shrugs off the suggestion that Kakashi might be able to fight toe to toe with him and uses his special illusionary technique, Tsukuyomi (God of the Moon).
Itachi's Tsukuyomi takes Kakashi into an illusionary world where he is able to control time and space. He binds Kakashi to a cross and repeatedly stabs him with a sword for what amounts to 72 hours in the illusionary world, but in the real world, it's only a matter of minutes. The technique is quite freaky - a number of Kakashis are bound to crosses and a number of Itachis repeatedly stab him over and over.
When Itachi is finished, Kakashi collapses and Hoshigaki warns him not to use his technique too much. Kakashi asks if they are after Sasuke, but Itachi clarifies that Naruto is their intended target. Kakashi flashes back to when Jiraiya told him that he would train Naruto. He had suspected that the Atasuki, a group of nine ninjas, most of which are S-rank criminals, might come after the Nine Tails. Orochimaru used to be a member of this group, but he left recently.
Kakashi's in no shape to continue the fight, but luckily, Gai shows up. And, after being Kakashi's main rival for years, he understands the way to fight the Sharingan. Never look into their eyes, but use your peripheral vision to anticipate their actions. Sensing that Gai will give them some trouble, Itachi stops the battle (and sadly, we don't get to see Gai kick Itachi's butt…)