Sy "The Photo Guy" Parrish (Robin Williams), imagines himself to be part of the seemingly happy Yorkin family. He's obsessed with them and has photos of the family through the years covering almost an entire wall in his barren apartment.
Sy's boss at the SavMart (Gary Cole) discovers discrepancies between the number of prints processed and the number paid for, and fires Sy. Before Sy's last day at work, he discovers that Will Yorkin (Michael Vartan) has been cheating on his wife (Connie Nielsen) when When Yorkin's mistress (Erin Daniels) brings in film showing the two of them together. Sy punishes the adulterers, confronting them in their hotel room and posing them for nude photos at knifepoint, but doesn't hurt them. The police catch him.
The whole movie has been Sy telling the police what led up to the hotel room incident. After telling the police his story, Sy asks to see the photos he took of Mr. Yorkin and his mistress. When the photos are layed out on the table, we see that they are of various objects in the room and not the terrorized couple. He did not actually take the explicit photos he made them pose for.
It turns out Sy's deep-seated problems stem from him being abused as a child, possibly by someone in his family posing him in nude/sexual photos, similar to how he posed Mr. Yorkin and his lover.
Thanks Lisa E and A Rose!