If Man was created in GOD's image does that mean GOD is capable of cruelty and saddism?
cru⋅el 
 /
ˈkru
əl/
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[
kroo-uh
l]
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–adjective, -er, -est. 1.willfully or knowingly causing pain or distress to others.2.enjoying the pain or distress of others:
the cruel spectators of the gladiatorial contests. 3.causing or marked by great pain or distress:
a cruel remark; a cruel affliction. 4.rigid; stern; strict; unrelentingly severe.
sa⋅dism 
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ˈseɪ
dɪz
əm, ˈsæd
ɪz-/
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[
sey-diz-uh
m, sad-iz-]
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–noun 1.
Psychiatry. sexual gratification gained through causing pain or degradation to others. Compare
masochism.2.any enjoyment in being cruel.3.extreme cruelty.
To understand the answer to this question you must understand the complete use of the words you are using to describe God, not the popular understandings.
First of all "cruelty" is a matter of perspective.. All except definition 2 of cruel can be used to describe a loving God.. It is the reason why harsh things are allowed to visit us that is important here.
Just like if a child were to claim a large bag of candy after Halloween, and was told to eat 2 pieces of candy a day and was caught eating 10. To the child what may follows next may seem cruel or unfair, but it is in the best interest of the child that the candy be taken away.. Was it cruelty or love that lead the parents to act?
From the child's perspective, in the Halloween candy situation, coupled with a toy or something else he may have wanted and the parents denied him, it would be easy especially if he were still emotional to lash out at his parents and claim or describe a sadistic pattern of cruelty.. Primarily because he doesn't know any better, because his parents through love have protected him from true cruelty and sadistic actions.. All he knows is what causes his little world to spin.. Want and selfishness, and because there is opposition to his want and selfishness, he will either be force to grow spiritually or he will grow to resent the opposition he is faced with.
Often times we can adopt the same view towards God, and how he does things, especially when his
will and our want, and selfishness clash.
Did God create Hell as an eternal punishment for wicked people?
Your description is a popular christian belief, But Hell (Simply put)is a place without God or anything of God.. Hell is the alternative to Heaven (Being in the presents of God) If in this life you choose that you do not wish to spend an eternity with God then Hell is the place you can have what you want.. What makes it "hell" is not what medieval artist may have depicted, but a complete absences from God, and the rest of creation. We are members of creation, and as such long to be with the creator, being strip of that opportunity will indeed cause much weeping and gnashing of teeth. The devil doesn't run hell, he's there for the same reason as everyone else is.. He chose to be there. Living out of God's will places you in a realm outside of God's creation when the final Judgment is proclaimed.
if everyone was created in God's image there must be good in them somewhere? Right? Even if we are the merest shadow of what God is we all must have some good in us? Right or am I wrong?
Good and evil is not the measure in which we are Judged.. Our Judgment is a matter of sin and Righteousness.
Sin: Is anything not in the will of God.
Evil: Is a malicious intent to commit sin.
"Good" is just a matter of perspective, or something Mothers will use to determine whether a "good" little boy is deserving of a treat.
Righteousness: Is living in God's expressed will.
As far as being Righteous no one can be righteous enough to earn a place in God's presents. God sets the standards here. He has proclaimed through his law the complete Standard in which righteousness can be obtained. It is written if any of you break the least of my commandments you are guilty of breaking all of them. So being righteous enough is not possible. Now because he is a just God we have an alternative to being "Good" or righteous enough to trying to earn a place in heaven. This is where the whole Jesus thing comes in.