To install a new character, the most important thing you need to do after checking the zip file is to look at the readme which most decent authors should add.

1st step:
Follow this treasure map and you shall find what u seek. C:\ => Program File => LittleFighter2 => LF2_v1.9c => Sprite => sys
Put all the .bmp files of the new character in there (the folder sys)

2nd step:
go to C:\ => Program File => LittleFighter2 => LF2_v1.9c => data
put all the .dat files (and .wav files if there are any) into the folder (data)

3rd step:
open data.txt and add sth along the lines of
id: ?? type: ? file:data\???.dat
id: ??? type: ? file:data\???.dat
as in the readme which you can copy from * u should add them between and which you can see in data.txt

4th step:
save the changes to data.txt u hv made and play ur new character

** Special case:
some characters do not work in the same way when installing (maybe the author wants to confuse noobs ) look at the lines of id you r required to add. eg Havoc creator's Tiger

id: 500 type: 0 file: data\Tiger\Tiger.dat

the words in red actually tells you that where the .dat files are supposed to be, so all you hv to do is to create a folder called 'tiger' in the 'data' folder.

IMPORTANT
Don't change the ids in data.txt when installing custom characters! Make sure they don't have the same ids as the other custom characters as well! Or else you will either create shadows or using some else's move...