Loli!  

It appears that there's been a slight time jump since the last episode, as Pam is back and Yuu is able to control his Ayakashi now.  They're suddenly attacked by an Ayakashi who successfully hit Yuu with some type of beam that causes to lose consciousness and fall into a dream state.  In the dream, we're introduced to Kare, who is seeking to free all Ayakashi users from their curse.  He asks Yuu for his help because the Dragon's power is the key to remove that curse.  He also reveals that Izumi, Yuu and Hime's childhood friend who passed away, was an Ayakashi user.

Later at Kare's house, Kare and Yuu are talking about Izumi and Kare explains to him how a person becomes an Ayakashi user.  Yuu wants to know why did Izumi die because he can't recall those memories.   Kare tells Yuu that if he agrees to help him he could use his Ayakashi to return those memories to Yuu.  Back to reality, Pam and Eimu are still fighting with the Ayakash.  Pam tels Hime that Yuu is under the memory theft spell, which allows the user to take any memories from his target.  Eimu tries to save Yuu with her Ayakashi as the scene shifts to the "real" Kare sitting and concluding the episode with an evil laugh.

Impressions:

This was quite a confusing episode to follow with all the different dream sequences.  Since much of the events in the episode were not real, the story really only progressed for a few minutes.  All that happened was that Yuu fell under Kare's memory theft spell.  I'm assuming this is to set up the next 1 or 2 eps.  It's not clear what Kare wants in Yuu's memories, but there's implication that Izumi probably has something to do with it since the mysterious nature of her death remains one of the focal points in the story.