Diane Selwyn is a struggling actress in Hollywood. She moved to L.A. from Deep River, Ontario after winning a Jitterbug competition that inspired her to become an actress.

We descend into the pillow at the start of the film from Diane Selwyn's point-of-view. From now, until the moment we see her wake from the bed, Diane is dreaming. She dreams that she is Betty, a fresh-faced actress arriving in Hollywood. She dreams that Rita stumbles into her apartment after an accident, having lost her memory. She dreams that she wows the various assembled showbiz people at her audition. The dream climaxes with the haunting Club Silencio, the disappearance of Betty, and the opening of the blue cube back at Havenhurst. 

A knocking on the door awakes Diane from her bed, and she raises herself from her slumber to answer the door. The scenes that follow are intended to illustrate the breakdown of a relationship between Diane and Camilla and subsequent mental collapse of Diane. Tricky thing is that Lynch presents them to us in a non-linear style.

It's up to you to decide the chronological order of these scenes, but the crux of this interpretation is that it is inferred that Diane hires a hitman to kill Camilla. So from this point of view, the flashbacks can be seen as Diane's attempt to justify the murder in her mind, and the dream as an attempt to re-live and re-imagine Diane's life since her arrival in L.A.