Okay, so I just started reading the Sandman series, Issue 1 to be exact, and although he seems to be a nigh-omnipotent character I am still confused as to how he was so easily captured and imprisoned? Was there a reason he could not defend himself?

He was basically imprisoned by the power of ancient laws and lost deities combined. It's not that he didn't have the power to get out, it's that he couldn't/wasn't allowed to use it.

I say, he has unlimited power with dreams, or nearly unlimited. But he's not all powerful in other things.

Regardless, I think he's awesome

"Regardless, I think he's awesome"

Well technically he is very VERY powerful, but he is a sort of omnipotent being whose power is both limited and limitless, it's difficult to tell.  But he did talk about Lucifer Morningstar in The Sandman: Season of Mists how Lucifer is far more powerful than himself, so while he is powerful, I believe Lucifer could take him down.

I remember him complaining about being cold during the time he went to go recuse the queen from hell. I think he's a intermediate reality wrapper user.

Feats done with fraction of Dream's power

it's stated the ruby (materioptikon) can turn dreams into matter:

http://i.imgur.com/nAOXWq3.jpg

He apparently made contact with the dream-continuum due to meditation. He also says that his mind is very powerfull due to the exposure to the Materioptikon and that he somehow tapped into a cosmic energy source with which he can now create reality in the dream-world.

http://i151.photobucket.com/albums/s132/Erik_Magnus_Lensherr/DoctorDestiny68.jpg

fraction the dreams power..has been used to reshape reality itself”http://i151.photobucket.com/albums/s132/Erik_Magnus_Lensherr/DoctorDestiny68.jpg

The following scans are from JLA: classified 4th parallel.

To summarize the arc, the red king has taken control of the materioptikon and through it he was able to create infinite versions of himself in infinite realities hoping that one version of himself would rule his reality/world:

JLA classified #33

Here, it is explained that red king ran infinite versions of himself through infinite possibilities, and only three are left and by creating alternate versions of himself he was actually creating alternate universes which contains those versions in hope that one of them would end up ruling the world, JLA classified #36

http://i.imgur.com/nzYdDnV.jpg

Here the red king says that we have 3 realities running at once (confirming that each version of himself is in a separate reality):

http://i.imgur.com/oNHpofX.jpg

JLA classified #36

And if somehow this isn't enough proof, batman says that through the materioptikon red king was able to create a multiple realities in hopes that one of them would succeed to rule his world, and only 2 maybe 3 exist:

http://i.imgur.com/4yFm2qe.jpg

In the first page of the issue, it's stated that red king created infinite versions of himself and the ones that failed were destroyed and only 3 are left, proving that he created infinite universes/realities:

http://i.imgur.com/YT97H6d.jpg

More emphasis on the materioptikon

JLA classified #32:

It's stated that all of existence is threatened by it:

http://i.imgur.com/0YZCNZY.jpg

It casually destroys a universe/possibility:

In that same scan above, Destiny references the 6 billion facets, these are references to the 6 billion universes that were mentioned in the story arc, these 6 billion universes were still there even after the Red King reduced the infinite universes the materioptikon created, to 3 universes, and Destiny was using the materioptikon to remove those 6 billion universes.

http://i.imgur.com/ySIktyX.jpg

@agentofchaos1: Please where can i Read all this story of the ruby of dream ?

Also, in the Kindly Ones, why didn’t Dream simply kill the Kindly ones. They were both in the dreaming at one point, couldn’t Morpheus simply think them out of existence?

He's very powerful but also someone who limited by a lot of rules many self imposed. It also wasn't easy to capture Dream. What happened was Dream had been severely weakened by the events in Overture which is why it was possible for him to be captured when any other time it would have been an impossibility. Add to that it was Desire and possibly Despair who set motions in place for Roderick.