The film opens with Inuyasha (human) sitting in a small cabin in the forest. Kagome slings her arrows over her back and leaves Inuyasha to stay and keep out of trouble. Meanwhile we see Naraku burst through the woods running incredibly fast when Hiraikotsu slams into a tree beside him. Sango is on him (this was really cool, it looked like something out of Ninja Scroll). Finally they chase him into the clearing where they all deal some serious damage to him. Naraku transforms into a giant spider demon and then crushes the cabin where Inuyasha was hiding just as the sun rises.

Inuyasha tears out and a lengthy battle ensues (pretty gruesome too). Eventually Kagome fires an arrow through Naraku's chest and he dies. No one seems able to believe it, but Miroku removes his prayer beads and sure enough his Wind Tunnel has vanished.

Eventually the group separates and tries to get on with their post Naraku lives. Kagome goes back to school while still stopping by to help Inuyasha and Shippo search for the Shikon Shards. Miroku goes back to see Mushin with Hatchie and they discuss how he has finally broken his family's curse as he visits his father's grave.

Sango goes off to find Kohaku who has been chased by a pack of demons and has an arrow logged into his leg. Eventually she saves him and they travel together again.

As all this happens Inuyasha and Kagome meet with a young man who is apparently Hojo's ancestor (I thought it was Nobunaga at first). He travels with them for a while.

While all this is happening, behind the scenes Kanna and Kagura are gathering items to free a woman named Kaguya from her imprisonment inside a magical mirror. They slaughter villages and kill many in their search for the items. The sleeve from Inu-Yasha's kimono was also needed, and Kagura succeeds in getting it.

Once Kaguya is freed she attempts to use her mirror to imprison Inu-Yasha's human half thus forcing him to become a whole demon. He resists her, and eventually the group gets back together. Kaguya continues to increase her powers and eventually uses her mirror to raise a giant castle on a mountaintop. While they fight, Inuyasha is pinned to a tree and Kaguya reverses Kagome's arrow at him. Instead of letting it kill him Kagome jumps in the way and takes the blow, but not before Hojo's ancestor tosses a piece of fabric between the arrow and Kagome. The fabric was one of the final things needed by Kaguya, so she takes it and Kagome off to the castle.

The others attempt a rescue but have to face off against Kagome's giant, multi-headed dragon over a lake. Kikyo arrives to help Inuyasha deal the killing blow before heading off again. Inuyasha has a funny scene of shaking the water off like a dog that was pretty hilarious. After bandaging their injuries Kaguya casts a spell that begins to petrify everything around the castle. Hatchie and Ancient Hojo turn to stone, but everyone else does not because they are wearing bandages and things from Kagome's time (either that or because Kagome had handled them). Needless to say they covered themselves in bandages and Band-Aids and headed off to battle (which looked really bizarre). Inuyasha was wearing a locket that Kagome had given him with both of their pictures in it, and this saved him from petrification. Miroku even takes some ink and daps it on his hand to at least make it look like he still has his wind tunnel.

Inside the battle ensues as Kaguya grows more powerful (and wears a sexier outfit). Kaguya disarms Inuyasha and uses her mirror once again to draw out his demonic side. Miroku rushes up to him to tell him to get a hold of himself, but almost has his stomach torn out for his trouble. Shippo helps free Kagome who rushes over to Inuyasha and tries to help him resist. Demonic Inuyasha grabs her so hard that his claws dig into her arms, but Kagome does the only thing she can to help him, she kisses him and he begins to turn back (and kisses her back as well).

This causes Kaguya's mirror to crack and she gets really angry. At about this time Kagura and Kanna have played their parts as far as they want. They use the Kanna's mirror to suck away some of Kaguya's life force and then suddenly a spider burn mark emerges on Kohaku's back. Miroku's Wind Tunnel screams back to life and in a truly grotesque scene Naraku's torso with spider legs grows from a pustule on Kohaku's back and he goes on a rampage.

Kaguya zaps him sending him away (but not killing him as Miroku points out because of his hand). They finish their battle with her and then the castle begins to collapse as they make their escape. Suddenly a black cloud chases them and it is Kaguya once again followed by Naraku who grabs Kagome. Inuyasha knocks Naraku away and Miroku uses his air rip to suck up the black cloud that remains of Kaguya. As Sango watches Naraku, Kagura, Kanna and her brother all teleport away together through the mirror.

The group follows them through the mirror to escape the collapsing castle. Naraku and the others are gone, but everyone has escaped and the petrification has disappeared.