Beat 'Story Mode' with Miroku to unlock 'Bankotsu' as a playable character.
Any character of the game can be unlocked by finishing the story with out losing any continues in any difficult level.
Beat 'Story Mode' with 'Sesshoumaru' to unlock 'Full Demon Inuyasha' as a playable character.
Beat 'Story Mode' with Shippo to unlock 'Human Inuyasha' as a playable character.
Beat the game with Inuyasha to unlock Naraku as a playable character.
To get Naraku's castle beat all the missions in mission mode and bam you got Naraku's castle for a stage.
Go to practice or 2 player combat as sesshomaru and go to the black pearl stage. Jump of the edge and as soon as you jump off the wing thingy, press -> or <- and X and you will be walking on thin air outside of the stage area. You may have to do this a few times, so I suggest practice mode. and also, you will have to be a quick button pusher.