Pathetic. I can't believe no one knows this. You all disgust me.
Anyway, for anyone who cares, you'd have to put in the "Test Modes" code and access the hidden menu. There you'd set the arena to the number "6" (the Armory) and on the last page of the menu you would check the option "Oooh, Nasty". After all that, you chose Raiden as your fighter, and when it was time to finish your opponent at that battle that takes place in the Armory, you'd hit "back, back, back, block". If you did it right, your opponent would turn into an odd looking little man with the head of Fergus McGovern (the head guy of Probe, who developed the Sega versions of MK2) that emitted smoke.