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Once you have unlocked Extra 7, you also get a few "cheat modes". There are 4 files "counter.demo", "hard.demo", "title.demo" and "water.demo". "title.demo" is the standard version and is there so you can reset everything to normal after you changed the settings. "counter.demo" makes it so that all your attacks are counters. Means that everytime you strike, active enemies get undressed even if they're not attacking at the time. Obviously it is different for bosses. "water.demo" means that you always get the watercanon rather than the squirtgun. "hard.demo" makes everything much more dificult, or so I'm to understand. Wether that means more damage done to you or even instant defeats when caught, I don't know.
How do you implement these changes? Well you can only activate one at a time. You copy one of the three change files ("counter-", "hard-" or "water.demo") and paste them somewhere else. There you change the name to "title.demo" (yes, the name of the fourth file which is there to change things back to normal). Then you cut and paste the file in the main folder, where all the characters and stages and activation button are. It will tell you that there already is a file called "title.demo" there (identical to the reset file, obviously) so just replace it. Voila, you now have your cheatmode activated.