You must time these actions perfectly for this to work. Choose Arcade mode at the main screen and proceed to highlight any unlocked character you have.Then hold L2 and press R2 once every 2 seconds for 10 seconds (5 times). Let go of L2 and tap "up" direction pad 2 times then wait 5 seconds and tao "down" direction pad 2 times. Now exit back to main menu, then simply go back to Arcade mode and you will have all the characters in the game unlocked.