"And God saith, ‘Let Us make man in Our image, according to Our likeness, and let them rule over fish of the sea, and over fowl of the heavens, and over cattle, and over all the earth, and over every creeping thing that is creeping on the earth,’" (Gen. 1:26).
Some people think that being made in the image of God deals with the physical likeness, as if God has a body of flesh and blood. This is not the case. Jesus tells us that God, in reference to the Father, is spirit (John 4:24) and the spirit does not have flesh and bones (Luke 24:39). Therefore, it cannot be true that we are made in the image of God the Father in the sense that God the Father has a body of flesh and bones.
So then, what does it mean to be made in the image of God? It means that we are made in his likeness in that we have some of the same attributes that God has. For example, God is rational (Isaiah 1:18) and so are we. God can love (John 3:16) and so can we. God can hate (Psalm 5:5; 11:5) and so can we. Because we are made in God's image we are able to have compassion, mercy, grace, fellowship, friendship, etc. However, as God is all knowing, we are not. God is ever present, but we are not.
So, the image of God in us means that we are like him in some, not all, of his attributes.