Illusion

Illusion is an unknown entity that takes the form of a semi-transparent Sonic.exe. (see Image for a better clue)

It's powers are unknown but it shows the ability to move through walls, as well as being seemingly invulnerable.

Illusion can only appear and harm the victim when they absorb a Red Ring. There are 2 types of Red Rings, both with varying durations.

Imperfect: These rings appear in Knuckles' stage called "It's Just Illusion", which is also where the enemy debuts. While the rings are dangerous, they're the only way to progress through the impassable walls that block the echidna's path. They last approximately 18 seconds...

Perfected: These rings debut in Mecha Green Hill, which can only be accessed if only Tails and Knuckles are alive. Tails absorbs one when tossed at by Sonic.exe. They seemingly have no differences apart from duration, which is drastically lengthened, lasting up until the level ends.

Trivia
● Albeit unlikely, it can be assumed that the Sonic.exe following Knuckles before the actual assault is Illusion, since it is half-transparent. The reason it's unlikely is because it can only be normally seen only after absorbing a red ring... For those unaware, I'm talking about this image:

● Yes, it is indeed a different entity, SEPERATE from Sonic.exe. It can be proven with this quote: