i didn't think it was horrible, but probably should have been better...
I think it's clear Kakashi is hinting at Mangekyou Sharingan causing blindness over time. I watched Rasengan Fansubs this time, and the way they subbed it made it quite clear that Itachi might be losing his eyesight by employing that jutsu. Also, Itachi's surprise comes from Kakashi figuring this out, since it seems like only someone who has obtained Mangekyou and felt the adverse effects would know this (or was told)
The stuff with Gai was stupid and annoying. Tenten has clearly fallen behind the rest of her group, she always looked very scared and unsure whenever Kisame attacked. I agree that the three of them getting trapped in the Water Prison tech was quite lame. They had just seen that Kisame could make a Water Clone, so they should be on the look out for him having a Bunshin Clone jutsu as well...
I agree about the peripheral vision thing, but I don't think that accidentally seeing his eyes would do it. I think your brain would have to register it (Itachi using his Tsukyomi (sp) jutsu on the person) consciously, or otherwise how can the Genjutsu take effect?
the cutting between the scenes is also getting on my nerves. like i said, this episode is not terrible imo, especially since I don't have inflated expectations from reading the manga, but it could have been better.
oh, and a friendly reminder. if you get caught in the heat of the moment and spoil, i may just get caught up in the heat of the moment and ban you. fair?