In Xenogears, she is possessed by the Miang factor, thus transforming herself in Miang 0997 (Miang 0998 is the Miang in white suit seen in Xenogears). Contrary to the usual transforming signs seen in other Miang hosts, Karen's hair does not turn blue. It is very clear, however, that Karen is indeed Miang, which is revealed in an anime cutscene where Karen, Kahn, Fei and Grahf are meeting outside Wong's house.
In the events of Xenogears, when Karen Wong turns herself into Miang, she kidnaps Fei and takes him to a secret testing facility where she and Krelian perform several aggressive experiments on him, due to the fact that Fei is the last known -Contact- incarnation. This is probably the same lab where the future Kahran Ramsus, who was known at the time as 0808191 Ramses was being held and created. This was Krelian's attempt to create an artificial -Contact- because Miang was unable find to out where the real one was.
In this earlier mentioned 'meeting' Fei releases Id due to the emotional pressure and indirectly kills Karen (Miang). However Karen recovers his identity in the last seconds just to witness the killing blow as an attempt to save her son from a certain death.