I have to say that upon watching this film for the first time, I was utterly confused, yet hopelessly drawn to trying to figure out what the hell was going on. It was like something in the recesses of your imagination, not quite formed but you know it will come together.

I read some theories and interpretations (including Minderbender's) located around the web and decided to go and watch it again the next day, to see if anything made more sense this time.

I would suggest that you not read ahead if you haven't seen the film, there are spoilers to follow.

While I admire Mindbender's interpretation, the symbolism is not something my mind can easily process. With this in mind I'll share a more literal interpretation, which, for me at least gave me some semblance of understanding.

First of all, let's look at the last third of the film (pretty much everything after the blue box is opened). For many people, this is where it goes from plain 'weird' to full-on surreal. You go from having a vague idea of what's going on to being turned upside down, characters are different people all of a sudden for example.
Let's just imagine for a second, that instead of this part of the movie being the end, and turning the truth on it's head, what if it was in fact the beginning, and the only truth in the whole film?

We have the hopeless Diane, a seemingly failed actress and now jilted lover of the cruel Camilla. Try to look back on those scenes and remember the people she meets as she is humiliated at Camilla and Adam's engagement party. Bitter and enraged she hires a hit-man to kill Camilla, who says he will leave a blue key with her when the job is done.

Now let's go right back to the beginning of the film, past the Jitterbug opening scene (how did Diane realise she wanted to become an actress?). We are shown a few seconds of blurred imagery and heavy breathing, before we seemingly rest onto a red pillow. Why is that exactly? We are going to sleep, into a dream world. The next two thirds of the film is basically Diane's dream, wish fulfillment on how her life should have been. Instead of a failed actress she is Betty, a peppy would-be starlet waiting to be 'discovered'. Rita/Camilla escapes what could be described as an attempt on her life, and becomes completely dependent on the incredibly talented Betty.

If you remember the party scene, you will find that many of the people that Betty meets during the film are the people from that party. They are incorporated into her dream in various roles.
There's the seemingly vast conspiracy to cast an unknown blond called Camilla against the director's wishes. The bumbling hitman who can't do anything right. The cowboy, whom is only glanced at fleetingly, but has a large role in her dream. This is all Diane's wish fulfillment being acted out on her own private screen. There are various clues during the film that hint to Diane/Betty that she is dreaming, but she glosses over them (Betty and Rita calling the D. Selwin in the phonebook "Feels strange to be calling yourself.")
The most noticable is Club Silencio, this is her subconcious telling her in no uncertain terms that she is dreaming ("This is all, a tape"). Her uncontrollable shaking is signifying that she has 'woken up' in a sense (lucid dreaming?) and has realised what is going on. Shortly afterwards she disappears completely and we are snapped back to reality.

That is only a vague outline, highlighting a few points in the movie. There are countless more 'clues' and references that appear to validate this theory throughout the film, and half the fun is watching it again to spot them.
I didn't want to ruin the fun too much, just to get people going, to play it back in their heads and see how it all ties in. It's isn't the only theory and I'm sure there's no 'right' one.

It's a film I'll be watching for a long time.

If there's anything you feel I might have missed or that I should address to make this writeup clearer, just let me know.

I just received my copy of Mulholland Drive on DVD and it came with an insert with some 'clues' to the movie. I think they were originally published in The Guardian but didn't include them at the time in case I was stealing their copyright or something.
It reads as follows:

David Lynch's 10 Clues to Unlocking This Thriller

  1. Pay particular attention in the beginning of the film: at least two clues are revealed before the credits.
  2. Notice the appearances of the red lampshade.
  3. Can you hear the title of the film that Adam kesher is auditioning actresses for? Is it mentioned again?
  4. An accident is a terrible event...notice the location of the accident.
  5. Who gives a key, and why?
  6. Notice the robe, the ashtray, the coffee cup.
  7. What is felt, realized and gathered at the club silencio?
  8. Did talent alone help Camilla?
  9. Note the occurences surrounding the man behind Winkies.
  10. Where is Aunt Ruth?