When entering the school, talk to Konohamaru. He is on the ground floor between the Mission and Challenges doors. Entering the password gives you a character item. These character items unlock the character, but it can only be used after you have beaten the game.

Password	Effect
D K F I A B J L	Unlocks Gaara
I K A G D E F L	Unlocks Gai
J G D L K A I B	Unlocks Iruka
G B E I D A L F	Unlocks Itachi Uchiha
E B J D A G F L	Unlocks Jiraiya
A L J K B E D G	Unlocks Kankuro
G J H L B F D E	Unlocks Kyuubi Naruto
A H F B L E J G	Unlocks Orochimaru
H F I C L K B G	Unlocks Temari
C G H A J B E L	Unlocks The Third Hokage