Nick_Scryer, I think it's an interesting idea, keep us informed of your progress.
But I think you can use not only MK3 sprites, ninjas from MK2 look cool, for example subz, reptile and scorp may be based on MK2 stances, ermac and rain from UMK3.
I finished the ladder and started the fighting. Zones not work yet, I want to redraw each one.
If anybody is interesting in my work, you can download it.
Demo (182 Mb) Updated
Source code and description (0,6 Mb) Updated
All my complete sprites in png (76 Mb) (I think it is not usable for mugen projects because of enlarging)
Some of my edited sprites in psd (17 Mb) (original sprite's size, maybe usefull)