Carmen had been killed by Jacob 12 years ago and he had been serving time ever since. In jail, through his interactions with other folks and putting them in different roles, he imagined a life that could have been if Carmen was still alive and he was not in jail. But the truth keeps on creeping in his thoughts no matter how hard he tries to imagine a good life. Every incident, every scene, every line in the movie has a meaning and is parallel to his real life in jail. For example, the reason he finds himself chained to a bed is because, in jail, he actually is chained. The teddy bear in his imagination was the same teddy bear that Carmen had when she was a little girl. The movie is full of these hints.
In the end, when he escapes from his imagination and finds himself in jail, he asks his lawyer to look for a picture in the secret spot. Now is that picture really there or not, is something that has been left for the audience to decide. Since his imagination was so strong that he can actually create a life so real that it feels real to him. He believes in it without a doubt. But in reality, it's just his imagination. The lawyer finds the picture. But is it really there or does she actually believe Jacob so strongly that she imagines it to be there? As they say belief can move mountains.
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