My interpretation (spoilers): the popular interpretation is that the first part of the film is Diane’s (Naomi Watts) hopeful, idealistic dream interspersed with nuggets of the grim reality that emerges in the second part. Jumping off of that, I believe that both parts are equally dreamlike, and the story elements unrelated to Betty’s (Diane’s dream identity) predicament almost completely concern Adam Kesher (Justin Theroux), the talented director who becomes broke, learns his wife is having an affair, and whose latest project is overtaken by mobsters. The first part presents a bitter, cynical life that is remedied in the second, wherein he is almost a caricature of a successful celebrity director. I believe this suggests mirror dreams, Camille (or Rita, played by Laura Harring) in each one a doll for either Adam or Diane to shape in his or her ideal image.
If one of the central themes of the film is the frustration of an artist trying to maintain control of his art in the face of the limitations of the Hollywood studio system, then perhaps there is a chronology that runs between the two realities, the first part depicting Adam as a frustrated artist forced to sell out and the second part depicting his wonderfully shallow, superstar life afterwards. From this perspective, Diane would appear to be the talent that got shafted in favor of the studio’s commercial choice, Camille. When the struggling Diane explains that both she and Camille vied for the role and that the latter won the part, she may be recounting events surreally dramatized in the first part, in which Adam’s statement, “that’s the girl,” makes Diane (or in this case Betty) panicky and uneasy, as if she is either recalling the defining event that drove her to failure or actually enduring it as it unfolds in a heightened dreamworld.
What is fascinating to me more than anything is that both parts of the film seem to exist simultaneously, given the plot threads that tie them together with such a compressed temporal proximity and overlap, and at the same time they seem like they could very well be years apart, as if there is some kind of consistent reality that binds them together (the neighbor who wants her dishes back for example) and doesn't compartmentalize either into a fully dream or fully real world. Finally, the stem of so much of my frustration and intrigue has to do with Diane being awaken from being asleep (or dead) only to return to the same pose upon killing herself, as if it is cyclical, and the Cowboy may as well come back to resurrect her (or wake her up) yet again.