Almost the entire movie is a dream on the part of Diane aka Betty (Naomi Watts), except for the part after Rita opens the box.
In real life, Diane killed "Rita" (whose name in real life was Camilla Rhodes). The reason why she killed Camilla is that she was angry and jealous that she hooked up with Adam (the director) and was starring in a new movie.
After Diane kills Camilla (aka Rita in the dream), she goes to sleep one night, filled with guilt, regret and paranoia. In the dream, she creates an alternate fantasy of what "could have been" (if Camilla never died) and a revenge fantasy on Adam.
The scene with Billy Ray Cyrus is Diane getting revenge on Adam. She imagined that he came home to find his wife cheating on him, and then got beaten up by the boyfriend and thrown out of the house.
The scene with the woman getting shot in the butt was Diane worrying that the guy she hired to kill Camilla was too stupid to do the hit correctly and somehow gave her away as being her murderer. At the same time, Diane was hoping the hit man was so dumb that somehow Camilla escaped and was still alive.
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