Dorothy, the lead character in "Wizard of Oz", is having a dream wherein all people have different names and identities as in real life.
Betty starts off into her dream world in a yellow cab, as Dorothy starts off on the yellow brick road.
The opening Jitterbug dancing in MD is a subtle reference to The Wizard of Oz, in which there is a famous jitterbug scene: The Witch sends a pink and blue bug (known as the "Jitterbug") into the Enchanted Forest. When the Jitterbug bit one of the characters, he/she would start dancing helplessly. However, the production company reasoned that the sequence added little to the plot and, because a dance by the same name had just become popular, they feared it might date the picture and cut the footage out.
The overriding color at Winkie's diner is green. The capital of Oz is Emerald City, where green was naturally the color of choice.
The Cowardly Lion came to Emerald City for courage. He ended up seeing "The Man behind the Wall (The Wizard) and passed out. Dan came to "Winkies" to finally get rid of this god-awful feeling. When he faced the man behind the wall he passed out/died.
Just as the Wizard of Oz is a fraud, the magician at Silencio shows that it is all an illusion.
In the Wizard of Oz, the Winkies were the little people living in the West who were dressed all in yellow, enslaved by the Wicked Witch of the West, and later freed by Dorothy.
Wall behind Winkie's
In the scene when we are approaching the graffiti wall behind Winkie's, we see a straw-colored plant that looks very much like a broom. Below is written "West Coast" (= Wicked Witch of the West?).
In Oz, there is a character named High Coco-Lorum, who is the King of Thi, a walled city in Winkie Country (located West of the Emerald City). If we look at "Mulholland Drive", Coco is the landlord of a walled complex at 1612 Havenhurst (located in West Hollywood). Also Diane lives at Sierra Bonita West-Courtyard.
In Oz, there is a character named Roquat, described as the Nome (Gnome) King, ruler of the underground world, a malevolent, devious, and treacherous character. He is "about 4 feet tall". Michael Anderson (Mr Roque) is 3'7".
At Sierra Bonita courtyard, Betty & Rita are seen walking on a brick walkway.
Aunt Ruth's last name is Elms (= Auntie Em?) — dubious, perhaps more likely to be a Lynch reference to trees. He supposedly has a thing for trees, phones and highways/roads (Rhodes).
David Lynch has used Wizard of Oz imagery in previous movies (notably Wild at Heart).
