Envy is a homunculus who has the ability of shape-shifting. They use this power to assume the form of any person and even copy their voice. They usually serve as a spy, but their abilities are also extremely useful for assassinations. Envy may not be as smart as some of the other homunculi, but is by no means an idiot. In fact, they can be just as good a puppet master as Lust, but this is overshadowed by their cockiness and bad temper. Their temper can easily be set off by insulting their large and delicate ego, causing them to make mistakes.
In the 2003 anime series:
As the oldest Homunculus, Envy claimed that they had forgotten what they originally looked like. Envy also greatly hates all humans and follows Dante mostly for the opportunity of killing as many people as they could. This is what drove Envy in all that they did and unlike other Homunculi, Envy does not care about the Philosopher's Stone, nor about becoming human.
Toward the very end of the series, it is revealed that Envy was created four hundred years ago by Hohenheim in an attempt to resurrect the son he and Dante had, who later died from mercury poisoning when he was eighteen years old. Envy held a great hatred toward Hohenheim for never being acknowledged as his son and for abandoning him and Dante.
In the manga and 2009 anime series:
Envy was the fourth Homunculus created by Father. Though often referred to as a "he" Envy is apparently genderless and can take almost any form they choose. Referred to by Lust as the most cruel or sadistic of the Homunculi, Envy shows the most open disdain of humans and relishes in any opportunity to hurt, humiliate, or insult them. They are also quite vain, short tempered, and dislike anyone insulting their appearance.
Beneath this cruel exterior however, Envy is secretly envious of humans' inner strength and the mutually beneficial friendships that they share, since most of the Homunculi show little real concern or emotional support for each other.
Henshin a go go baby! Transformation is a staple in many genres of anime, from fighting to magical girl. The sacred rule of transformation is that no other character is allowed is interrupt while you power up to your next form, so of course you want to make things spiffy with a henshin sequence.