Has it occurred to anyone besides me that Dan is speaking to Diane when he says "It's the second one I've had, but they're both the same"? Diane has this same dream twice. The central questions are: when in relation to the incidents recalled in flashback did she dream? When did she have the flashbacks — after the first dream, after the second, or spread between both? I suspect that the lights out in the Adam/Camilla make-out in the front seat indicates the passing of a night between that flashback and the next; that could mean she slept and dreamt the second time between those two flashbacks. She definitely went to the party before the first dream and paid Joe after the first dream.
Diane had at least one initial face-to-face meeting concerning the contract with Joe. At that meeting — which isn't shown in the film — he described the blue key but didn't show it to her. That is when he deposited eight butts in her ashtray; he probably smoked a couple after each roll in the sack with her. This meeting may have been either before or after the engagement party at Adam's.
Then she dreamt for the first time. Like Dan, the Cowboy also was talking directly to Diane. If she did good — by not paying Joe for the hit — she would not have the dream again, so the Cowboy would not look in on her twice. When she got up from the first dream, the key was not yet on the coffee table. All the flashback events precede the first dream, but Diane has the flashbacks after the second dream, because they all happen after we see the blue key on the table.
Some time after the first dream, Joe dialled Diane's extension on an in-house phone system. The ringer on the answer machine is turned off, but the phone by the red lamp rings. Joe tells Diane to meet him at Winkie's in five minutes — so the cops won't have time to set up surveillance, in case she's setting him up. If this is the hairy-arm call, then Diane must have anticipated it the first time she dreamt. I believe the fact that the butts are precisely the same and even the window light is the same in dream and flashback is Lynch telling us the call happened before the first dream.
Diane does bad by paying Joe to kill Camilla. Days later, she finds the blue key in the arranged place, brings it home, sets it on the coffee table, goes to bed, and dreams again. She is awakened by the neighbour coming for her dishes and the red lamp. The red lamp was in apartment 17 before the switch, but I don't believe we see it before the switch.
Diane hallucinates that Camilla has come back from the dead and has a series of flashbacks. The knock on the door panics Diane, and she kills herself. Actually, it was not detectives at the door — but Ed McMahon and the prize patrol.
I don't believe Diane dreamt after she shot herself. The blue key — indicating she did bad — was on the table when she got up from the second dream. If she did bad before the first dream, the Cowboy's warning would be pointless. The only thing that comes after she shoots herself is Silencio.
When the Cowboy looks in the second time, the corpse is rotting and the mattress is ripped. Maybe somebody — like Joe — thought Diane had more cash hidden in the mattress.