To see the "Bad ending", finish the game with all 5 dragons of Earth.
To see the "good ending", finish the game will all 5 Dragons of Heaven.
After finishing the game once with Subaru, you can hold down L1 while choosing him to add the bandage over his eye to his 3D model, the same can be done with Seishirou after beating the game 1 one using him, if hold down L1 while choosing Seishirou you will remove his sunglasses.
In order to Obtain Karen as a playable character you must finish the game will all 5 dragons of heaven.
After doing so, she'll be a selectable character in both "Battle mode" and "VS mode".