Play as Kyubi and/or Demonic versions of other characters
First things first, you need to unlock all of the other characters in the game and I mean all of them. During the character selection screen, perform the following:
Hold R1 and press O to select the character. That's it.
Unlock All Characters
With a Naruto Hero 3 save game on your memory card, you can unlock pretty much everybody except for Sasori, Itachi, Deidara, Chiyo, Kisame, and Hokage #4.
100,000 Yen at Start of New Game
Very simple. All you need for this is a Narutimate Hero 3 save game in your memory card.
Missing Characters in NH3 Save game
This is only for those of you who have an NH3 save game on your memory card.
Chiyo: Complete RPG mode.
Yondaime: Finish Hero mode.
Deidara: Kill him in RPG mode.
Sasori: Kill him in RPG mode.
Itachi: Complete RPG mode.
Kisame: Kill him in RPG mode.
Unlockable Characters
This is in case you don't have a Naruto Hero 3 save game on your memory card. You can simply unlock all of these characters by performing the following actions.
Zabuza: Kill him in Hero mode.
Gaara (old one): During Hero mode, eliminate his Shukaku self with Naruto.
Temari (old one): During Hero mode, unlock the scene with her battle up against Shikamaru in the Chuunin Exams.
Chio: Complete Master mode.
Didara: Kill him in Master mode.
Shizune: During Hero mode, unlock Tsunade's scene where he attacks Orochimaru.
Kisame: Kill him in Master mode.
Sandaime Hokage: During Hero mode, kill Orochimaru while using him in Konoha's Invasion.
Sasori: Kill him in Master mode.
Orochimaru: During Hero mode, he will be unlocked after he fights Naruto.
The Yellow Flash: Obtain every memory piece in Master mode, special and regular ones that is, then go complete Hero mode.
Nidaime Hokage: During Hero mode, unlock Sandaime's funeral.
Godaime Hokage (Tsunade): During Hero mode, unlock her fight scene with Orochimaru.
Kankurou (old one): During Hero mode, unlock his fight against Shino in Konoha's Invasion.
Haku: Kill him in Hero mode.
Kabuto: During Hero mode, kill him with Naruto.
Jiraiya: During Hero mode, unlock the part where Naruto must defend Tsunade from Kabuto.