the 4th was a great hokage and ninja and all. yes, he was strong, but not strong enough to contend with kyubi at all. he doesn't defeat it with his own strength, he just summoned gama bunta and sealed him. And when Jiraiya says, "i'm sorry 4th". what i believe this to mean is that, since kyubi is such a powerful being, that sealing such an entity wouldn't fit in one life time of a person. so i believe, that the 4th died and was reborn as Naruto with the kyubi still sealed in him.