here's how to unlock all characters:
Unlock Jiraiya:
Using Naruto Uzumaki in Story 1 Defeat Jiraiya to unlock him as a playable character.
Unlock The Third Hokage:
Defeat Orochimaru with the 3rd Hokage in Story 1 to unlock him as a playable character.
Unlock Shizune:
Using Tsunade in Story 2 defeat Shizune to unlock her as a playable character.
Unlock Selaed Orochimaru:
Complete Story 2 to unlock Sealed Orochimaru as a playable character.
Unlock Tsunade:
Complete Story 2 to unlock Tsunade.
Unlock Kabuto Yakushi:
Complete Story 3 to unlock Kabuto as a playable character.
Unlock Nine-tails Naruto:
Complete Story 4 to unlock Nine-tails Naruto as a playable character.
Unlock Zabuza Momochi:
Using Jiraiya in Story 4 defeat Zabuza to unlock him as a playable character.
Unlock Haku:
Using Sasuke in Story 4 defeat Haku to unlock him as a playable character.
Unlock Orochimaru:
Complete Story 4 to unlock Orochimaru as a playable character.
Unlock Anbu Kakshi:
Complete Story 4 to unlock Anbu Kakashi as a playable character.
Unlock Kisame Hoshigake:
Complete Story 4 to unlock Kisame as a playable character.
Unlock Itachi Uchiha:
Complete Story 4 to unlock Itachi as a playable character.
Unlock Byakugan Hinata:
Complete Story mode (4 Arcs) and talk to Hiashi Hyuuga outside the arena and again on the rooftop. Then talk with Hinata at the training grounds and go to the arena and defeat Neji to unlock Byakugan Hinata as a playable character. (if you already have over 20 jutsus learned, and have done this go talk to kakashi in the hot springs to fight for hurricane formation, then go to the forest to fight him for young lightning)
Unlock Taijutsu Naruto:
Complete Story mode (4 Arcs) and then talk to Gai at the marketplace. Go to Tanzaku Town and buy one of the suits Gai and Lee wear(100,000 ryo) and then go to the outskirts of Tanaku Town to fight Gai, defeat Gai to unlock Taijutsu Naruto.
that's all the characters, and how to unlock them(plus young lightning).
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Thanks to ps2man617 for awesome sig and avy(name put on avy by MV).
Been a while since I was on supercheats, so my profile is mostly way outdated
Dranixger =
Dragon + Phoe
nix + Ti
ger