At the high scores screen, press A+D on controller 1 at the same time as you press B+C on controller 2. Now go into the game and will notice blood and Mai!
Choose anybody that has a projectile attack, for example Ryo or Kyo. Then select King or Yuri Sakazaki as your opponent. Keep on using your projectiles until they have no more health. When the last projectile hits the opponent, some of their clothing will break.
Note: It will only work on King or Yuri Sakazaki.