This can ONLY be done in UMK3. You must win the round by beating your opponent in the 3rd round and giving him mercy. They will come back to life with a tiny bit of health left. Defeat them again and press a series of specific buttons to turn into an animal and kill your opponent.
Pick Sub-Zero and beat your opponent in the first round, lose in the second, then win in the third. When 'Finish Him!" appears, quickly jump back and hold the RUN button and then press four times for a Mercy. Defeat your opponent again then, on 'Finish Him', touch your opponent and while holding block, press quickly.