My interpretation (spoilers, spoilers, big spoilers!)

Rating: Null/10 (26 October 2001)

have seen MD twice now, and here is what I think it all means (as brief as I can make it).
MD starts out with a dream sequence of a disheleved jitterbug contest, with Diane/Betty emerging as the winner. From there, a shot of a woman who lies on a bed, shivering, and obviously dreaming, and who is covered in burgundy sheets.
The entire first two hours of the movie is a dream, which is followed by a half hour of what was really going on. To add to the confusion, even the reality sequence has several flashbacks. So here is the story - the real life story - told in sequence (BIG SPOILERS):
Diane S. wins a jitterbug contest in a small town in Ontario, and after her Hollywood aunt dies and leaves her some money, she ventures forth and ends up in a budget apartment where she embarks on her Hollywood career.
She meets "Woman in #12", her roommate and lover, at least until she meets Camilla Rhodes, who not only beats her out of her first lead role, but befriends her, and helps her get small parts. Camilla likes whoever she can get the most out of at the moment, just like any Hollywood star, and attaches herself to Adam, the self centered, recently divorced director who casts her in his most recent movie. Diane, in desperation, confesses to both her roommate/lover, and Camilla, her love for the latter. Her roommate leaves her, Camilla tries to get her to see reality by inviting her to a party on Mulholland Drive, where her pending nuptials to Adam are announced. Jealous and humiliated, Diane engages a hitman to have Camilla killed. The meeting takes place at Winkys, and the hitman promises she will see a blue key in a certain undisclosed place when the job is completed.
The job is completed, and full of guilt, love, regret, jealousy, and many other emotions, Diane falls asleep and dreams... This dream takes up most of the movie, and the people in the dream are largely at the aforementioned party. She dreams she is not Diane at all, who is dead, but Betty, a kind, wonderful, caring, capable, talented actress whose aunt is not dead but merely on vacation. She dreams Camilla is not dead, but instead has amnesia, after a close call, and seeks her help and consolation. Betty helps Camilla try to find her true identity, and along the way has sex, confessing her love again. The hitman, as shown in two sequences, is not an efficient killer, but is instead a bumbling idiot, who didn't carry out the job assigned to him, so Camilla is not dead. The diner is shown to be a place of evil, with the bogeyman in back. The maniacal old people that meet Betty at the airport are not who they seem to be. They show up again at the end of the movie, crawling under the door. I think they are supposed to be Diane's real parents, outwardly normal, but in reality evil, at least to Diane. Betty/Diane didn't really lose the role - Adam had his eye on her - but it was a mafia inspired conspiracy that made Camilla Rhodes, the name, not the actual person, actually get the part. Even Adam's divorce is dreamed about, and he is not the egotistical, manipulative director of real life, but instead a scared, spurned pawn in a larger game.
But Diane's dream goes awry, just like her real life plans, and she ends up at the nightclub with Camilla and finds the blue box that the blue key will open. When Camilla tries to open the blue (pandora's) box, Betty disappears, and the dream ends. When Diane wakes up, the same burgundy sheets around her, her ex-roommate/lover comes to the door and gets back some of her stuff, and lets her know that some detectives still want to talk to her about the death of Camilla. Beside herself with guilt and regret, unable to even masturbate and fantasize about Camilla anymore, she finds a gun and kills herself.
A larger theme of this movie is that Betty is the character most people associate with Hollywood actresses, whereas most actresses are more like Diane - talented but broke, living from hand to mouth, and getting screwed by the system and other Hollywood types at every opportunity to advance themselves.
Well, that is my interpretation...FWIW, I really enjoyed this movie, and think it is one of the best of 2001...
Duane