The story of Naruto begins with the story of the Kyuubi's, a demon of legendary power which could level entire forests and destroy whole mountains with a single swipe of its nine tails, attack on Konohagakure. Although Konohagakure suffered heavy casualties, the 4th Hokage managed to seal the demon using the Dead Demon Consuming Seal which trapped the demon fox in a newborn baby at the cost of his own life. The baby's name is Uzumaki Naruto.
Naruto grew up as the container of the demon fox. Though the Fourth Hokage wanted Naruto to be viewed as a hero for such a burden, the villagers could not see him beyond the monster that destroyed their homes. The Third Hokage, who had taken over once more after the Fourth died, made a decree preventing anyone from telling Naruto about the demon within him. As such, Naruto was shunned by everyone around him and didn't know why. Though Naruto found some friendship in children his age, even they came to ostracize him, following in their parents' example.
Once Naruto was admitted into the Ninja Academy, he was befriended by his Chunin instructor, Iruka Umino. Iruka's own parents had perished in the demon fox's assault, and even though Naruto contained the demon fox, Iruka knew what he was going through and empathized with him. Iruka was the first person to believe in Naruto, and as a result, impacted his development greatly. Iruka became a father-figure for Naruto to look up to.
Training at the Ninja Academy
At the ninja academy, Naruto's reputation as a dropout and a troublemaker earned him infamy among the teachers and students. Iruka, and to a lesser extent, the Third Hokage, were the only two positive influences on him. Unbeknownst to him at the time, Hinata Hyuga also thought very highly of him because of his determination and fighting spirit. Despite this, Naruto continued to fail the graduation exam, which required students to demonstrate how much they had learned by performing the Clone Technique. While Naruto was decently skilled in most of the basic jutsu taught at the academy, for some reason he could never perform this one correctly.
Mizuki, another Academy examiner, used Naruto's depression after his most recent failure to trick Naruto into stealing the Scroll of Seals, a collection of forbidden techniques housed within the Hokage's study, claiming that Naruto would be automatically passed by simply learning a jutsu from the scroll. Not one to pass up such an opportunity, Naruto immediately did so, and the first technique on the scroll happened to be the Multiple Shadow Clone Technique, something he wasn't happy about.
As search parties were sent to find Naruto, Iruka gets to him first. Naruto had been training the entire time, ignorant of what he had done, and simply repeated to Iruka what Mizuki had told him earlier. Iruka realized what Mizuki wanted just as he showed up to attack them both. After he injured Iruka, who pushed Naruto out of the way, Mizuki tried to get Naruto to give him the scroll while Iruka tried to convince Naruto to do otherwise. Their argument led Mizuki to tell Naruto about the truth everyone had been keeping from him: that he was the container of the demon fox. Startled, Naruto runs off, leaving Iruka and Mizuki to fight amongst themselves. Naruto watched from a distance, eventually learning what Mizuki was after, as well as the true level of Iruka's devotion to him. Just before Mizuki could kill Iruka, Naruto attacked him, threatening to kill him should he ever touch his sensei again. Confident in his superiority, Mizuki claimed he could beat Naruto with one attack, only for the exact opposite to happen. Using his newly learned Multiple Shadow Clone Technique, Naruto beats Mizuki to a bloody pulp. Impressed that Naruto could master such a difficult technique, Iruka lets Naruto graduate, ironically fulfilling Mizuki's original promise.
Formation of Team 7
In order to officially obtain the rank of Genin, Academy students must undergo a field evaluation administered by a Jonin, who will be their squad leader should they pass. Students are organized into groups of three Genin, with a Jonin-sensei assigned to each team. Teams are chosen to balance skills and abilities. As such, Naruto, being the worst student, was paired with Sakura Haruno and Sasuke Uchiha, the two brightest ones. The other teams (that would pass) were Shino Aburame, Hinata Hyuga, and Kiba Inuzuka in Team 8 and Choji Akimichi, Shikamaru Nara, and Ino Yamanaka in Team 10.
Team 7's initial group chemistry was terrible to say the least: Naruto was infatuated with Sakura and detested Sasuke, Sakura was infatuated with Sasuke and detested Naruto, and Sasuke was a lone wolf who detested the both of them. Unfortunately for them, their Jonin instructor was Kakashi Hatake, who emphasized teamwork above all else.
Kakashi's field evaluation, considered the strictest of its type, is simple but difficult; in fact, he hadn't passed anyone during his time as a Jonin. All the Genin have to do to pass is take a bell from him using any means necessary before noon. Aside from the fact that three Genin are taking on a Jonin, Kakashi only has two bells on his belt, ensuring that one of them will fail. On top of that, the students are tricked into skipping breakfast. Those who get the bells get to eat, while the one who doesn't is tied to a post. The main purpose is not to test the Genin's skill, but rather their teamwork. Team 7's performance during the exam was terrible to say the least: Naruto fell into every trap Kakashi set, not bothering to be at all stealthy about his attacks, Sakura did nothing to help, even getting tricked by Kakashi's Demonic Illusion: Hell Viewing Technique genjutsu, and Sasuke didn't bother to help either of them, instead attacking on his own because he believed they would slow him down. All three failed to get a bell.
After their failure, Kakashi berates all three for their lack of teamwork. He eventually explained to them the purpose of the exam, and allowed them to eat in preparation for a second try. Naruto, who had stumbled upon the lunches Kakashi prepared and attempted to eat them, is tied to the post. After he left, Sakura and Sasuke realized that they'll need Naruto in top-shape if they're to retrieve the bells, and decided to feed him against Kakashi's wishes. Kakashi, of course, was watching the whole time and appeared in a giant blast of smoke, appearing quite furious. The three Genin claim that they're a team, and as such one person. Quickly changing his attitude, Kakashi lets them pass for figuring out the purpose of the exam. He also recites the exact message he was trying to get across - "In the ninja world, those who don't follow the rules are scum - That is true, but those who abandon their friends are worse than scum."