|Teddy, the bad cop, has been taking advantage of Leonard's inability to make short term memories, getting him to do hits on drug dealers which Leonard thinks are revenge killings for his wife's murder. Carrie Ann Moss also uses Leonard to do her bit of dirty work. All of Teddy's manipulations--moving Leonard from hotel room to hotel room, deleting notes from his investigation--are to keep Leonard pliable and confused. When Leonard gets suspicious he's being used, Teddy tries to confuse him by saying (i) that Leonard already avenged his wife's murder, (ii) that Leonard killed his wife with insulin after getting the idea from Sammy (who faked his condition). This is contradictory, so Leonard writes "don't believe his lies" on the polaroid, and finally kills Teddy. However, some of what Teddy said may be true; all Leonard has to keep himself going are his core memories, the stories he tells himself, and his instincts. The movie suggests that's really all any of us have.
I love the chase scene where he can't remember if he is chasing or being chased. I think about that movie often, my short term memory is almost as bad as Leonard's. I am constantly walking from one room to another and then can't remember why or what I got up for.