In "HIS" image can mean two things:
1) Allah's image himself
However, by the consensus of the scholars, this does not mean Allah looks like us. That is because Allah says "There is none that is like him" in surah Shura. And in Surah ikhlas "There is nothing equivalent to him".
"In his image" does not necessitate tamtheel (to be alike). Rather just like Allah has hearing, he gave us also hearing. Just like Allah has a face, we also have a face even though there no similarity WHATSOEVER!!!
This is like the hadith "The first whom will enter Jannah will be in the image of the Moon"... Meaning they will be beautiful like the moon because we know that we will still be human beings. The exact word "Image" is used here.
This is also how the Quran mentioned the women that saw Yusef said "This is not a human! this is an honorable Angel" due to him being beautiful and gorgeous. And we know for a fact they have not seen an angel, yet it is the fitra that we imagine Angels to be beautiful.
2) The second opinion is that "HIS" is referring to Adam himself. So, meaning that we were all created in stages starting off as sperm and the egg. However, Adam was created in his image right from the start.
This seems to be the stronger opinion since in Bukhari, the rest of the hadith continues. "Allah created Adam in his image, his height is..."
So since the Prophet sallalahu alayhi wa salam began discussing "his height" and the rest of the hadith starts describing Adam and the incident with the Angels, it seems to be closer to the opinion that it is referring to Adam. And the arabic can hold both of these meaning, and Allah knows best.