Kakashi shows up in time to stop the attacks of Naruto and Sasuke by grabbing their wrists and throwing them away from each other and into the water towers at the top of the hospital (presumably to buffer their fall and minimize the damage of their attacks). He noticed the attack Naruto used against Sasuke and has some suspicions about it. His suspicions are confirmed once they impact against the towers.
The tower which Sasuke crashed into is partly deformed and begins to pour large quantities of water as soon as he draws his hand out, while Naruto's tower only shows the telltale spiral signs of the Rasengan, and a minor hole in the center where the attack was concentrated, from where a small amount of water comes out once Naruto moves his open palm out of the way.
Sasuke seems to be very happy with the effects of his attack on the tower and the fact that Naruto's attack only caused a small dent in the front of his tower. He is momentarily distracted by Kakashi who begins to berate him for acting childish and having used Chidori against Naruto. He regains his composure and jumps over the side of the roof and lands on a shed, from where he has a perfect view of the back of Naruto's water tank. It's been completely blown off. He stares at it open mouthed while questioning just how far Naruto has come.
Kakashi and Jiraiya have a rather interesting conversation where Jiraiya confesses to having taught Naruto the Rasengan as a defense against Akatsuki, but tells him he shouldn't be talking since he taught Sasuke Chidori which is also dangerous. Even so, he did not think Naruto "would use it against a comrade". Kakashi comments that Naruto's relationship with Sasuke is much like Jiraiyas own once was with Orochimaru. He sees Sasuke both as a friend and a rival at the same time.
This last outburst of erratic behavior on the part of Sasuke causes Sakura to rethink the promise she made him of not telling Naruto about the seal given him by Orochimaru. In the end her emotional distress and guilt over keeping it a secret seem to win out and she decides to tell Naruto the truth, whom she's managed to convince to come for a chat with her, by calling it "a date". He accepts and they end up at his favorite noodle place.
Sakura tells him about the seal on Sasuke's neck and how Orochimaru gave it to him when they were back at the forest. Naruto admits that he's run into Orochimaru since then, and has seen him fight on equal ground with Tsunade (5th Hokage) and Jiraiya (Perverted hermit -_-) . He assures her there is nothing to worry about, that Sasuke is stronger than that and would never accept an invitation from someone like that.
Kakashi tracks down Sasuke and ties him down to a tree and tries to get some sense into him. He tells him that vengeance is not the way and that he should forget about it and concentrate on the friends he has now. Sasuke get mad and asks him how he would feel if he killed somebody close and important to him. Kakashi's reply is that he can't... because that has already happened. In the he tells him the decision is his and leaves him alone.
Sasuke seems to be changing his mind and working things out with his inner demons, at least until he gets a little visit from Orochimaru's henchmen who've come to deliver a message.