and he does mention that it was hard to see with the fog...I think it's possible he never directly saw the Heroes, and only knew they were there and made his own conclusions from there.

In the event that he DID see them, I think it's perfectly possible that his mind would have twisted what he saw in order to keep his beliefs intact (which is necessary for his otherwise volatile mental status). This would support the theory that he is insane and his mind is a bit turned on itself, but it still doesn't mean he's necessarily evil. I don't think Byar does any singularly evil acts in the entire series....insane ones driven by zealotry, yes, but I can't think of any that are particularly evil.