There was a reason that the Academy Instructors weren't Jounin, and it was the fact that they were oblivious to certain things that a Jounin who expected to survive in the field for more than a week would notice. The Hokage had an excuse for not spotting what the Academy Instructors had missed, as he didn't spend several hours of almost every day with a number of the children of Konoha, as he had a great many other tasks to deal with such as the reintegration of the Uchiha Clan with the rest of the village.
While everybody was so focused on the usual competition for the top spot in the class, they didn't notice the fierce competition for another spot that was going on right beneath their noses. After Naruto had been transferred to the new Instructor Umino Iruka's class due to the fact that while the other instructors now pitied him, they were also scared shitless of him, a competition between the two best students in the class started. Rather than vying for the top spot, the pair of nine year-olds were trying to take the spot at the bottom.
Sasuke - who was doing this out of a sense of self-preservation as Naruto had seen him practicing with Itachi, and thought he was cool - had toned down his displays of skill quite a bit, and started trying to look like a complete moron to everyone, especially to the orphan his mother had all but adopted. The last time Naruto had thought someone in his family was super-awesome, they'd died, and he didn't want to share his father's fate. He'd known that it was an accident that had been a result of his father trying to hide a weakness that had caused his father's death, but his father wouldn't have been in the hospital in the first place if Naruto hadn't thought he was totally awesome.
Naruto, who had improved in leaps and bounds now that there were people who were helping him along rather than ignoring him, was trying to take the position of Dead Last so that people could underestimate him until it was too late, and he pulled out a totally awesome technique with which to defeat an enemy-nin. Where he'd gotten the idea to do so had been the Root ANBU who had been training him in the mystical arts of reading and writing. The man had told him that it was best to be underestimated until the last minute when he had asked for a lesson on how to become a good ninja. Why he was trying to be Dead Last however, was because he had seen Sasuke try to take the position, and thought the other boy was trying to become a better ninja than him.
After the competition had started, every lesson became a trial in patience for the boys' instructors as shuriken and kunai flew everywhere but the target, and the boys' handwriting devolved into something that even a drunken Mizuki who was having the time of his life working for Root couldn't translate.