When danzo took the cover off his arm, he warned his two henchmen first. Apparently taking the seal off his arm was something that people need to be warned about. When he took it off, we didn't see anything obviously dangerous happen that would warrant a warning first.
I think that Danzo's arm has create a high-powered illusion that extends in all directions (hence eyes on all parts of his arm). Sasuke and team are trapped in the illusion completely, which is why the sensor girl didn't detect the fluctuations of a genjutsu: they're both completely trapped in a "perfect" genjutsu. Alternatively, they are in an alternate dimension. We have seen Madara and Kakashi both have the ability to move people to other dimensions with their sharingans, maybe having enough sharingans has given Danzo a similar talent.
Danzo's eyes being his "lives" is interesting, but I suspect it's more evil than that: I think that the eyes hold the illusion open, and when they are all closed the illusion (and everybody in it) disappears. Sasuke wears out his chakra repeatedly killing Danzo, and then has no chakra left to prevent this little dimension from collapsing in on himself. Danzo certainly doesn't seem worried that so many of his eyes are closing, which suggests them closing isn't a bad thing for him.
The Itachi thing is interesting too. I think it's more likely that Itachi is appearing by his own free will than as a genjutsu that Sasuke or Madara have cast. Itachi was alive (hurt, but alive) until he touched Sasuke, and then he died. I suspect Itachi inserted most of his remaining life force into Sasuke before he died. If so, I bet Itachi can come and go as he pleases, jumping into the battle when he senses Sasuke is in danger. Itachi was a much better genjutsu user than Sasuke was (remember how the first half of their battle completely occured in an illusion Itachi made). I bet Itachi has the ability to detect and possibly disrupt Danzo's perfect illusion.
Very interesting chapter. I am looking forward to 478.