We know that the disturbed man was present at Winkie's the day Diane ordered the hit. Is she merely incorporating him into her dream as a possible "guide," meant to lead her to the monster of her own creation? Or does this sequence actually exist in the "real" world? Could the young man be a psychic who sensed the rupture in Diane's moral reality on that day, and has since become haunted by the apparition it called into being?
In reality, the guy locks eyes with Diane at the moment that she's making a deal to have her lover murdered. He has a strange, slightly fearful, and knowing look on his face. Now anyone who has ever felt guilty about something you've done will understand this symbolism completely. When you have done something wrong and you are afraid of people finding out, a level of paranoia sets in. Often when people make eye contact with you, there is a fleeting instinctive fear that they know or that they can see right through you, to what's really inside, which is really just a reflection of how you feel about yourself. Diane experiences this. The man looks at her, and for a brief moment, like most people experiencing guilt, it's like he's looking right through her, he can see what she's doing, what she really is - a monster. So in her symbolic fantasy, the monster hiding behind the restaurant is her, Diane. It's how she sees herself at that moment, and then her dream revisits this, only makes it more literal, giving 'the hiding monster' a physical form. - (DavidLynchsTerrier)
Diane saw Dan in the diner while sealing the hit on Camilla and so he embeds himself into Diane's subconscious. The troubled guy and his therapist are expression of Diane's inner dialogue between the ego (Dan; notice the similarity to Diane) and the super-ego (Herb). Diane, aware of her horrible crime, fears to admit the truth - namely being responsible for the murder of Camilla. Her subconscious tries to face her fears and seeks for acceptance. That's why he and his therapist take a look behind the diner to find out whether the gruesome vagrant exists. The bum himself symbolizes truth, which - as often - looks disgusting and awful. Yet the truth lies hidden, as the bum is hidden behind the wall. When he exposes himself, Dan collapses and dies. His death symbolizes Diane's ultimate inability to face the truth. - (cinefreak)
The fear that Dan describes is actually Diane’s fear. She has switched roles again so that we see her as Dan. The identity of Herb, the man she is talking to, is obscure, but is probably a manifestation of Diane’s Aunt, Ruth. An important piece of dialogue that supports this is when Diane (seen as Dan in the diner) says “It’s kind of embarrassing, but I had a dream about this place”. This has a double meaning relating to Diane’s aspirations in Hollywood ("and now I am in this... Dream Place!"). Herb responds with disapproval, “Oh boy”, as if he half expected the Hollywood dream statement. This dialogue makes sense if we think of the conversation as an interraction between Diane and her aunt. Possibly by intention, the name Dan is just two letters short of Diane. Dan, ie ... Diane. The intense fear that we see on Diane’s (Dan’s) face when she sees Herb at the counter, links directly to the fear she felt when she was being stared at by a man at the counter while arranging the assassination. - (Rob Ager)
I prefer the idea that Dan and Herb, like Betty and Rita, represent aspects of Diane's subconscious, forcing her to a) take a look at what she has done (the skeptical Herb), all the while b) trying to deny responsibility for it (the horrified Dan). That Dan and Herb could be identified as either or both Betty and Rita simultaneously actually fits with the rest of the film, as Diane's subconscious is working to reunite these different aspects of her personality, even while her conscious mind works hard to keep them apart, distinct from one another (because it allows her to continue to blame something outside herself - subterranean conspiracies of evil). - (Dan Jardine)
Diane at the start of her dream is trying to deny that the man who is doing it all behind Winkie's is real and does exist (she wants to believe that her monster bad deed of murder is not real and did not happen), but he is real (the hit did happen). Dan is feeling her anxiety and fears for her in proxy because he saw her and so the witness has to die to assure her dream-denial. - (TristanLove)
Interestingly, when you watch that film, Dan's friend goes with him and he never gives a reaction to the man. So it's something that Dan is seeing in his head and reacts to, because at that point the friend just pays attention to Dan, never turns around and addresses the man behind the building again. - (Michael Geoghegan)
Naomi Watts about Dan
"But then also, people have asked me, 'Was it the dream of the guy at the diner?' You know, the guy at Winkie's speaking to his therapist. Was that the one truthful scene in the movie, and was the rest dream? One of the things I learned doing a project a long time ago is that there is this whole research about dreams called Gestalt that says you are everyone in your dream. Not only every character but every texture – like the fabric in your dress or every leg of the table; everything you design or create in your dream is another version of yourself."
Dan's Two Dreams
mentions he's had "two dreams about this place". To me, this mirrors
the Cowboy's warning that he'll be seen one more time if [one does] good, two
more times if [one does] bad. Evidently, something went wrong, and Dan/Diane
ended up on the wrong tracks.
Dan has had two dreams both of which lead him to the same place, both of which foresee his own death. It is tempting to see this isolated scene as a précis of the film as a whole. What we have here is a man awake, briefly, attempting to interpret two frightening dreams in front of an audience (his shrink) only to find that his two dreams were prophetic to face his own death at the point of realization. The only connection with this scene with the rest of the film is that Diane sees Dan in that Diner at the cash register. This otherwise unconnected snippet is, I believe a hint, provided by the Director to the interpretation of the rest of the film - which bears the same structure: A woman awakes briefly and sees two dreams (perhaps as she dies a la American Beauty), which prophesy her own death, at which point in reality she sees the face. This face can perhaps be interpreted as a glimpse of true reality, the real that lies behind all the facades and diner walls in the film. - (timtak)
Related Theory: Two Dreams Of A Third Person
Dan and Herb being part of a dream
Dan said "I never see that face ever outside a dream." but this is a dream (not his dream, but Diane's). So Dan will see that face. He is doomed to be scared, and die. Diane had Dan the witness "murdered" in her dream. This scene is the second hint DL gave us that we are watching a dream! - (pegasus82)
Dan and Herb being real
While Diane is talking to the hitman at Winkie's we see Dan at the cashier’s register in the same clothes he was in during the Dan and Herb Winkie’s scene. This makes it quite feasible that Diane and Joe were there the same morning Dan and Herb were – with Dan first to arrive. However, to suggest this means that the Dan and Herb scene reflects reality rather than a dream. As the "monster" is later revealed to be a pathetic homeless this can indeed hold water.
Related Theory: Camilla is not dead
Struggling to catch the quality of dream light, Dan says that the dream took place in a "half-night." He may as well be describing an old Hollywood movie. Scenes that were supposed to take place after dark were usually shot in broad daylight, with the light filtered or mostly blocked on the way into the camera. The resulting image has an inadvertantly unreal quality, where figures cast long shadows even under cover of alleged darkness. In Hollywood, such photography is known as "day for night," but Europeans simply call it "American night" - the term that gave Francois Truffaut's essential movie about moviemaking its title.
When Diane sees Dan at the diner, he's of course standing "just there"...where Dan's Friend was. In his dream, Dan was scared...but seeing how scared Dan's Friend was when he was standing just there made Dan even more scared. I like the implication, Diane is scared (ordering the hit), but seeing Dan's reaction makes her more scared. - (KyleOrKyla)
Even before we get to that scene, it is worth pointing out that Diane's subconscious is sending warning signs and important messages to herself even during this fantasy in an attempt to save herself. We can see one example of that when Dan noticed an arrow pointing in the other direction as he was walking to the back of the Winkie's. If he had turned and followed the arrow maybe Diane's death could have ultimately been avoided. - (Alan Shaw)
After watching the movie again, I would almost believe that this scene is a flashback to a conversation that Diane overheard when she was working as a waitress there. Since the guy mentions that the Bum is the one making everything happen, she works that little bit into the grand conspiracy theory in her delusion. - (jason)