The movie (which takes place chronologically between the Tsunade and Tea Country arcs, after the Naruto movie special (combined episodes 95-96) and after Tsunade heals Sasuke and Kakashi (episode 98)) begins with a heroine previously unknown in the Naruto continuity: Princess Fuun. Fuun's nemesis, Mao, challenges her group with an army of undead soldiers. His dark intentions seem to prevail, that is, until Princess Fuun and her cohorts, Shishimaru, Brit, and Tsukuyaku, unleash the power of the Seven-Color-Chakra upon him. They save the day, and Naruto, watching from afar, couldn't be more elated.
As it turns out, Naruto is partially imagining the situation. He is actually watching the scene in a movie, as is the rest of Team 7. But then, the audience of the movie starts to throw objects at the team for making so much noise while arguing with the cinema manager. Kakashi had sent them to watch it as preparation for their next mission: guarding Fujikaze Yukie, the actor who plays Princess Fuun, while she makes the next move in the Snow Country.
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The movie takes place after the Sasuke Retrieval arc, but before the timeskip.
The movie opens with a battle taking place at night on a desolate seaside beach between Sand-nin and soldiers wearing bulky suits of armor (apparently European in influence). Despite their best efforts, the Sand-nin are slowly overwhelmed by the sheer strength of their mysterious opponents. The timely arrival of reinforcements led by Kankuro and Gaara evens out the odds, Kankuro slicing apart a suit of armor with his puppet, and Gaara dispatching a large number of enemies en masse with his signature Desert Imperial Funeral. However, when Gaara orders the Sand-nin to shine a flare at the retreating enemies, a large warship which resembles a pre-WWI-era dreadnought arrives to reinforce them. The ship then opens fire with some kind of missiles and Gaara's sand armor barely manages to protect his comrades.