How do you unlock the true ending on the shadow the hedgehog?

Beet all of the last levels as good and evil.
And you have the last story so you should be able to beat that and then you have the final confrontation with the alien leader dude and he looks awesome.

Sorry to tell you this but there is no true ending unless your talling about the last story because there is a last story mode.

To unlock the final story mode, you need to defeat every final boss. There are 5 final stages and each one has 2 bosses for it that you fight one of. Here's the list of final bosses in the order on the story board:
Gun Fortress-
Sonic And Diablon
Black Doom

Black Comet-
Sonic And Diablon
Egg Dealer

Lava Shelter-
Egg Dealer
Egg Dealer

Cosmic Fall-
Egg Dealer
Black Doom

Final Haunt-
Sonic And Diablon
Black Doom

To defeat Sonic And Diablon, basically attack diablon when his force field's down.

To defeat Black Doom, basically avoid his attacks and when he stops attacking you, homing attack him.

To defeat Egg Dealer, basically when the reels are being set to Bomb Fever or Missile Fever wait for the first two reels to be stopped, then homing attack the button for the third reel to stop that on the reel. That will make it attack him and he will get the damage from it.

Basically just beat all the Final Bosses on the main story and defeat the Final Boss on the Final Story.
Plus there basically more than just 1 ending................more like 326 endings. Hope this helps.