Someone I know does this.

He "took" someone's story and made it his own. It was about physical child abuse in a real twisted way, so it was one you remembered. I know the person it really happened to so the blatant story-telling is...sad in a way.

I think he did this for attention at first?

He also took others stories and made them into his, especially ones about being "Mr. Tough Guy."

It's like living in a fantasy world.

He does have issues, a personality disorder, not sure which one.

But I agree with Wants, denial and a blurry sense of reality will do it.