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Hold Start and press Down, Left(7), then any button at the title screen.

Alternately, you can access all the hidden characters except Red Demon and Young Athena on the character selection screen by holding R1 over the four top characters of the inner most rows of both sides. The following characters can be accessed by holding R1 while on the standard character's location at the selection screen:

Kyo: Geese
Terry: Mars People
Ryo: Goenitz
Kim: Evil Iori
Kasumi: Shin Mr. Karate
Ryu: Zero
Chun Li: Demitri
Dhalsim: DaN
M. Bison: Violent Ken
Vega: Shin Akuma

Enter survival mode. Defeat the opponents until you face the Red Demon. Defeat him to unlock him as a selectable character in all modes. To choose the Red Demon, highlight Tabasa, then hold R1 and press Square, Triangle, X or Circle.

Highlight Balrog at the character selection screen then hold R1.