For anyone not familiar with Lynch's "Lost Highway", let me try and sum it up as simple as possible.
Here's what I think happened if you were to put the movie in chronological order:
1. Fred is married to Renee. Their marriage is on the rocks. (scene: The first sex scene)
2. Fred suspects Renee is cheating on him. (scene: He's playing the sax and sees her leave with another man) (scene: He calls home to no answer and when he gets home she's sound asleep)
3. Fred hires someone to kill Dick Laurent, the man Renee is having an affair with. (scene: "Dick Laurent is dead", someone says on the intercom, supposedly the hitman)
4. Fred goes insane and kills his wife. He is arrested and sentenced to death.
5. His lack of sleep and massive headaches lead him to the doctor in the jail, where he's given meds.
6. The rest of the movie is his dream. Similar to Mulholland Drive, the dream starts out well but ends with the dreamer having to face reality: Fred is now Pete, and he gets exactly what he didn't get as Fred; lots of sex, adventure, etc. But his real self catches up with him (scene: sax music playing on the radio in the garage) (scene: Mystery Man telling him Alice is Renee)
Please feel free to disagree and state your own interpretations in this topic. As David Lynch said, for one person the meaning could be completely different to another person.