I think Inuyasha showed the most character development of all, second Kikyou and third Kagura. :/

Inuyasha goes from a bastard loner to someone who actually gives a damn about his friends.

Kikyou goes from a cold, selfish ***** to someone who is (sort of) kind and gentle.

Kagura goes from evil to not.

Although, this is more evident in the manga. I'm not too sure in the anime (though Inuyasha and Kagura most definately change, I'm not too sure of Kikyou).

And I hate it when people picture Kikyou as the 'bad guy'. >.>

__________________