Changing character colors is completely optional, but can look cool when done right. Feel free to skip this step.

Thanks to Suupabuu you can edit the colors of every character in MvC2. First, you need the software. Go download and unzip PalMod: PalMod. (You want version 1.76 or newer: old versions are not recommended.)

Now open up PalMod. Go to File : Load Directory : MvC2 : DC and point PalMod to the directory containing the MvC2 Dreamcast files you want to edit. (This should be the root folder of your disc image.) That folder will have files in the format: "PL2A_DAT.BIN" and so on (PL2A would be Storm). There's a complete list of character file IDs here: list.txt, but PalMod makes it so you don't have to know those mappings.

(If you're using the NAOMI version, instead open that ROM using PalMod's Load ROM by Game : Sega NAOMI : MvC2. If you're using the PS2 version, instead use the Load Directory : MvC2 : PS2 option.)

You will see in the lower part of PalMod that under the character name there is a drop-down menu with different options. The first 6 options (LP, LK, HP, HK, A1, A2) are for each button for when you choose your character. (If you are using Jed's 16 color palette expansion, you will see more options here, of course.) The other Extras are additional action palettes for some characters that can be edited too. PalMod will try to handle any linked palettes (like Cyclops LP and Extra 02, his HK) for you automatically so long as you leave Process Supplement Palettes checked in the Settings : Advanced Settings options. Not handling those will cause the edited color you use to revert back to the original palette during some actions (ex: If you edit a mainly blue character and make him red, you might see some blue effects when that characters does certain moves).

Now just click on a color in the palette window and begin editing the colors. You can input RGB values if you know exactly what color you want. Or you can start editing the HSL (Hue, Saturation, Luminance) until you get the colors you want. Note that the Dreamcast and NAOMI have a limited color palette, so PalMod will have to round colors if you try to inject something that the game doesn't support. We're used to ARGB8888 (32bit color) these days, but MvC2 uses ARGB4444 (16bit color) and thus colors are somewhat limited.

If you want to turn on alpha (transparency) and create ghost-like characters, you can turn that in PalMod's settings as a special option. It looks cool but can be hard to play on competitively.

After you have finished selecting the colors you want save your changes to the game files by clicking "File - Patch Changes".

There's discussion of people's color choices and some examples in this thread at Shoryuken. And there's a bunch of previous excellent color edits in the PalMod Gallery. Sharing color edits can be as simple as a text string - such as (#10000F111FFFFF5FFF5DEF3AEF04AFFD9FFA8FD87FA51FC15F904F803F402F201) which you can paste into PalMod to get doc's Superman/Minty Magneto edit, or as useful as any of the indexed PNGs you see in the PalMod Gallery which you can drag and drop onto PalMod to get those character colors.