Except for one minor problem, when Vanellope reset the game code, it severed King Candy's connection to the codebase, so it would have rejected him as foreign code and would not have respawned him.
Also, there's a subtext that when someone is absorbed by a Cy-bug, their code becomes foreign code and is no longer part of the game.
Hence, all the panic and screaming, nobody would fear a Cy-bug in Sugar Rush if they'd just respawn after being absorbed by them.
Well, Ralph, Felix and Calhoun would have reason to avoid this, since they wouldn't respawn.
As to where he was hiding, I have no idea, but it would have to be a good place, seeing as nobody realized he was there until Vanellope ruined his cover.
It's also possible he was jumping from game to game, looking for the perfect one to take over.
Or it could be that Turbo was a master of disguise, changing his appearance so he couldn't be recognized.
I doubt the TurboTwins had a chance to escape, given how badly Turbo treated them (just look at the way they scowl at him when he wins the race), he would not have warned them he was gamejumping or even planned to.
And now I'm wondering how the Surge Protector missed Turbo sneaking around without catching him.
Maybe he was too busy chasing Ralph!
I'm uncertain if this is still the plot for WIR2, but the art book has some background information on a deleted scene (you can see that scene on the WIR DVD) where Ralph goes to an online game.
The way it was explained was, that if you plug a computer into the arcade's power circuits, the characters can move into that computer via the power cord, much like they do by moving from console to console.
And since Mr Litwak had a laptop computer in his office which was running an online game, Ralph and one other character jumped into it using this method.
I remember reading somewhere that will be the plot for WIR2, Ralph and Vanellope causing chaos in the internet gaming world.
As for villians, well, that's complicated.
It was established that the game villians are only pretending to be evil, they aren't inherently malevolent.
And the Cy-bugs are just stupid, they have no idea they are game villians.
So, I'm not sure where the villian could come from.
These are some possibilities:
An existing villian decides he wants to be evil for real!
A hero of one of the games decides he must hunt down Ralph for being a bad guy and inadvertantly becomes a bad guy in pursuit of a mistaken agenda to "be the big hero".
Or the villians could be anti-spyware programs, chasing Ralph and Vanellope down to "delete the internet viruses".
Or the villian could actually be an internet virus, trying to learn the secret of "game jumping" in order to take over every computer and game device in the world.
And one really out there idea:
Turbo had a backup copy program, in case he was deleted.
The backup activates, makes a new Turbo and continues his agenda.
Also, along those lines, what if there's another TurboTime game out there?
I mean, there's never just one console of an arcade game, there's hundreds.
So if another Turbo gets loose, he could replace the one who was killed in Sugar Rush.