Camilla is the blue-haired lady. It is her story — one of dreams, memories, and delusions. Camilla lives in an apartment that bespeaks 1940s Hollywood with its fireplace, artwork, and even its light switches. Her day-to-day life is a lonely one involving going to the theatre where she dreams of past glories such as by-gone jitterbug contests. She goes to Winkie's Diner much like the old people around Herb and Dan, especially to take advantage of the posted senior citizen discount for dinner. She is lonely and listens in on other people's conversations. The staff feels sorry for her and goes along with the act. The check is put right next to Rita. Diane said she would treat for coffee — but is there even a Betty there to pay for it? Reviewing the dialogue, there is no real indication that Betty is there at all. I think it is fun, at least, to picture a delusional old woman sitting at the diner where she buys two cups of coffee — one for an imaginary friend, long since past ("I remember something…").
There's also the connection of Silencio that Rita says, with the Silencio we hear from the blue-haired lady. This explains why we see Rita in the bedroom with Betty gone at the end of that dream sequence. It explains why Betty is the one shuddering in the theatre as the reality of her character falls away. I think that Diane did commit suicide and Camilla never fully recovers.
So why the Diane-centric dream and memories? Diane's story is not a dream but Camilla's daydream fantasy — a guilt-ridden imagination of Diane's end of life. Camilla imagines how, from Diane's perspective, life was a living hell of being on the outskirts of Hollywood with a famous friend who doesn't need her as much as she needs Camilla.
Many people have commented on the wedding announcement party scene being too dreamlike. Perhaps there is some truth to that. The party scene starts out so lovely for the couple, then falls apart starkly and cruelly when others at the party are introduced. Is this a strong metaphor for others being involved in their relationship in real life? I think yes. Whether Camilla was being mean or being kind by being cruel is not the issue as much as Camilla dealing with her guilt at betraying Diane's love. She explores that guilt through Diane's eyes. The fantasy is interrupted by broken china at the diner and is picked up again with Camilla in her favourite booth at her hangout — the old film theatre.
The scene where Diane wakes up can be viewed as Camilla exploring and wondering what caused Diane's suicide. Through Camilla's dream we see a downtrodden Diane in her apartment waking up to the reality of her life. Notice that Diane's bathrobe scene leads directly to the suicide scene at the end. In between we see arguments between lovers — that Camilla explores and perhaps feels guilty about.
Camilla feels guilty for what happens. She builds a dream that allows them to be reunited and gives them another chance for love. In the end, guilt as well as fundamental problems of roles and control make it impossible for them to be lovers — yet again. We see Diane closing the door, literally and figuratively, on their relationship. The focus on Diane is Camilla working out her guilt and feelings and memories through a dream about the one who died.
Camilla's dreams and fantasies do not reflect much of 2001 because she is more comfortable with the past. This explains the decade-inappropriate props and activities — the jitterbug contest, the hat boxes and dated things within Aunt Ruth's apartment, the old-style push-button light switches, the rotary-dialled phones and Philco refrigerators. Since Camilla is also alive in the 1990s it also explains how she can dream of modern items such as new Porsche convertibles. When she dreams of movie-making, the car is old, showing her preference for the past.
Camilla loses much of her Hispanic looks and accent and becomes the movie star, much like Rita Hayworth of Gilda fame. This idea may be reinforced by the red wig in Aunt Ruth's bathroom and the blonde wig that Betty fits on "Rita" — all looks that the dark-haired Rita Hayworth used in her film roles; yes, an actress who ended up marrying her director.
Any deeply seated guilt allows no dream to escape it. Camilla becomes Rita — the one with no memory of the past, a fresh start with her new love — but the reality of dreams is that they need to break down to the primary factors that caused the dream in the first place. Rita does not want to know the past but Diane is absolute in her need to play detective. Standard dream stuff, yet it ends with Rita being shown Diane's corpse. Is that Diane post-suicide or is that Diane being "hit" by the Cowboy?
When Camilla makes love to a willing Diane she still can't reconcile what occurs and repeats her pattern of denial and silence — or better yet, silencio. The dream ends with Club Silencio and the return to Aunt Ruth's apartment, but it is Betty who dissolves before Camilla finally wakes up. In the end, Diane is dead and Camilla hopes for the day when they are reunited — seeing both of them smiling among the clouds of heaven. Silencio.