What actually happens in Lost Highway?
I know; a difficult question. I do not want to pose a theory or claim that I have "the answer." I find it very annoying when people do this. I'd like to examine what we can actually take from the movie.
It seems to me that the ONLY things we can be sure of is the fact that Fred indeed has killed his wife (for he has been found guilty and sentenced for this crime) and that he is in prison. I believe we can also safely assume that Fred ONLY killed his wife.
The problem with trying to find "facts" in the movie is that it mainly consists of fantasy of the protagonist. These fantasies cannot be trusted in anyway, because the protagonist is biased. Fred wants to "bury" the memory of the crime and his guilt so he pretends that it never happened (fantasy one) and even that he is someone else (fantasy 2). The fact is: we cannot trust ANYTHING we see in these fantasies. The only "real" thing in these fantasies is Mystery Man. Fred doesn't want him there, but he pops up anyway. He wants Fred to remember. I don't believe we have to take Mystery Man literally, I believe he is just a manifestation of the rage Fred felt when he killed his wife. So, Mystery Man does seem to me to be a part of the crime Fred cannot suppress.
I used to believe that Fred ejaculated too soon and that this was the reason he could not satisfy Renee. She began cheating on him, landed in the porn business and that's why Fred killed her. Of course the videotapes would be references to this porn business, which we see elaborated on in fantasy 2. But...I don't think we can believe all of this. After all; the fantasies are meant to suppress reality. Could it not be that Fred just IMAGINES he had a reason to kill her? That this imagination merges with his actual suppression of the real events? Fred will do anything to not be reminded of his crime, but also to diminish his guilt! It's quite possible these two different fantasies merged together. As a matter of fact, it is quite logical. I don't believe Fred can seperate the crime from his guilt. So everything we see in these fantasies cannot be trusted. On the other hand much of it CAN be true or based on reality.
There's one other thing we can be sure of like I mentioned earlier. Fred ONLY killed his wife. When we see Fred killing Laurent (actually Mystery Man kills him!) Laurent is shown a videotape of the making of a porn movie. On this tape we also see Marilyn Manosn getting killed which pretty much resembles the footage we have seen of Fred killing his wife. Now, Marilyn Manson is a transgender, which suggests that Fred hasn't "killed the right one." He killed a man in his fantasy, while it is a woman he has killed in reality.
Secondly, Fred doesn't kill Laurent, but Mystery Man does. Fred isn't upset about it. Now it could be that he has no regret about killing Laurent, but when he speaks the words into the intercom he seems to remember. Now, are we to assume that he only remembers it at that point while we have seen him earlier committing the actual crime? That doesn't make sense. Those words and the revelation of Fred only make sense, when that line and that situation tricker something ELSE: he did not kill Laurent, but his wife!
The third clear clue to Fred only killing his wife is when Mystery Man tells him that Fred had invited him in his house. "It is not a custom to go where I'm not wanted," say Mystery Man. Fred has met Mystery Man at his house for the first time, which means he cannot have killed before.
The beauty of the works of Lynch is that we always deal with a highly unreliable view of the protagonist. In his last three films I believe Lynch has pushed the bounderies in this respect and therefor these movies are susceptible to many interpretations. At least as far as details go.