Suggested timeline of events:
1 - Diane on the set of Adam Kesher's film - While the movie timeline starts with Camilla/Rita's Mulholland Drive sequence, the actual reality timeline starts with Diane's visit to the movie set where Adam is directing a scene with Camilla, her girlfriend (even though it's seen as a flashback). Adam's very hands-on technique of showing Camilla's co-star how to properly perform a screen kiss leads Diane to suspect that the two are having an affair behind her back. Later, when Camilla visits Diane, Camilla tells Diane "we shouldn't do this anymore." Realizing her suspicions regarding Adam are likely true, she angrily throws Camilla out of her apartment.
2 - Diane at the dinner - The characters there will later be incorporated into the paranoid fantasy of her 'romanticized Hollywood' dream:
The director talking about the pool man becomes the director in her dream, also with Diane's idea of the pool man.
The fat man watching her as she drinks her coffee becomes the gangster who doesn't like his espresso.
Coco, the director's mother, becomes her landlady.
The cowboy-hat guy becomes the cowboy-hat Hollywood power figure.
The girl who kisses Camilla becomes the "Camilla Rhodes" in the dream part.
And of course, Camilla, her ex-lover, becomes the dependent, loving person Diane wants her to be: "Rita".
3 - Diane at Winkie's - After the humiliation at dinner, Diane decides to kill Camilla. At Winkie's, we meet the hitman she hires. He remains the hitman (and becomes a pimp) in her dream, although an amusingly incompetent one, possible because Diane fears he may not have been discreet in his actions, since she's been told that a pair of detectives have been asking after her.
The scary man in the background of this scene becomes the man with scary dreams in the dream-Winkie's scene.
Diane's fear (acknowledging the reality of the murder) is projected into her dream as the man's fear, the scary bum's face. We later see the connection, as it is this dream-bum who holds the box.
The single stack of dirty money is dreamed as clean, neat multiple stacks.
The plain blue key, that opens nothing but represents the murder, becomes futuristic looking, and now represents the 'key' to opening the repressed reality of the murder she is responsible for, hidden in the blue box.
The waitress at the diner becomes "Diane." (She is often mistaken as the prostitute seen hanging out with the hitman later, although it is not the same actress in both scenes. They do have very similar hairstyles, however.)
The waitress's real name, Betty, is the name Diane takes in her dream persona.
4 - Diane at home - The first scene of the movie (after the opening dance sequence) is filmed as Diane's head landing on a pillow, following the montage of the jitterbug contest she had won. We later learn that she already has the blue key, and knows the murder has taken place. At some point after that is the unseen moment when she begins her downward spiral into fantasy, falls asleep, and dreams.
5 - Diane's dream/fantasy - The first 4/5 of the movie-
It begins with Camilla/Rita escaping the hit Diane had just, in reality, taken out on her. "From there, Diane, a product of Hollywood, imagines the story in cinematic fashion: She sees herself as the naive wannabe starlet Betty, who succeeds on sheer talent and solves whatever problems are thrown her way. She even gets the girl!...she reimagines her ruined career and failed relationship with the woman she loves." - Salon.com. Her fantasy also punishes the director for getting the girl in the real world; he loses control of the film he's directing, his wife cheats on him with the pool man, and they throw him out of his house.
6 - The box - In the "Silencio" club scene, because of all the "illusion" comments and depictions, such as the singer, Diane realizes she is dreaming and shakes uncontrollably. On the edge of reality/waking, the box appears in her dream, as her subconscious could no longer repress her memories of murdering her friend. The box is the symbol of Camilla's death and inside it Diane's guilt, which she kept locked up by her fears (the bum/monster). Once Rita/Camilla unlocks it, the dream-cowboy says, "It's time to wake up."
7 - Diane's awakening - As shown on her face when she wakes, Diane is forced to face the fact that it was all a dream, the sadness of her own life, and the guilt brought on by having her ex-girlfriend murdered. Diane's neighbor knocks on her door, which is what actually woke her up, to tell her there have been detectives looking for her, additional confirmation that there has been a murder. From Salon.com- "She starts reflecting on how she came to be in this position, from Camilla's coolness to her flirtations with Adam to the unforgivable humiliations at the party. Diane sees that she's been reduced to an object of pity and contempt by even someone like Coco." In her kitchen, Diane says excitedly, "You've come back", to "Camilla" before quickly realizing it was just another hallucination/fantasy. This is when Diane goes into a flashback of:
2 - Diane at dinner, 3 - Diane at Winkie's, leading into:
8 - Diane's breakdown - This hallucination starts with the bum dropping the open blue box (the murder realization), and then comes the crushing guilt. The escaping little old people (the ones who are possibly her parents or grandparents) remind her of how far she's come and how much she's changed and also how she couldn't possibly face those people again, knowing what she's done. (When we first meet Betty, she is saying good-bye to this old couple, on to a better, brighter future in Hollywood.) As her guilt and the reality of what she's done overwhelm her (and with the hallucinatory breakdown of the old couple attacking), she shoots herself in the mouth, and lies dead on the bed much like the dead Diane Selwyn did in Diane's dream sequence.