K, I just got done watching the movie for the third time. The first time I saw it I hated it but I was really young and misled in the vein of movies I guess, or was just impatient with it. The last two times have been amazing though. I cant even sleep after I watch, it deeply affects me in a weird and unnerving way.
Anyway, my "theory" is a popular plus a bit of something I havent read anywhere else but no "clues" seem to point too. I believe the dream theory is correct, so much points to it, and the loose end of the very end (the itty bity old people) being that Diane is just plain crazy by then and her lost innocence drives her over the edge.
My only addition to this theory actually comes right after this scene, when things go blue and you can see the "man" behind Winkies (i believe thats what its called, its 4am). Now, this really affected me and thats why I am not asleep. I really, really looked into the eyes of the homeless person, and I believe it may be the "killed" Camilla. Where else would a burnt up actress go?
I know this may leave out little loop holes, or perhaps someone has thought of this before. Just my opinion or thought.
Now that I think of it there may be a clue that points to that...i have to go re-read the clues.
Thanks for reading
Cy

Okay, VERY good point.
Let me tell you what I had in mind.
First I watched Eraserhead, then MD, then Twin Peaks: Fire Walk With Me and then MD back again.
When I first saw MD, the most important part that stuck in my head was the Winkies scene leading to the man behind the place.
Now, the guy in Winkies says, "and now I know what it is. He is doing all this" or something like that. I was like hmmm
The same guy does things to "Laura Palmer" (as ordered by the "Dwarf"? - personification of evil or punishers of ones who do evil).

Now, I never got to see the TV show (Twin Peaks), which used to run here when I was a kid, I might have seen a few episodes, but I never got it at that time.
But anyway, after Twin Peaks the movie, I watched MD again and my mind took me back to the guy behind Winkies. The thing that 'he is doing everything' keeps taking me back to TP and return to MD. Who is he? A man who enters a person's subconcience? or posesses a body (Twin Peak's Laura Palmer's father and MD's Betty/Diane's old folks). And is the dwarf guy his master?
Is he just someone who enters the mind of someone who is somehow wrong, and uses their loved ones to go against them so they may suffer?

Maybe that is dumb, but I do think that the guy behind winkies and the dwarf are the most important in both films and the tv series. I havent watched Blue Velvit, Lost Highway or other of Lynch's films, and I want to, when I find them.

I think Lynch, who always seems to talk about conciousness, dreams is a HUGE fan of what people see when they are dreaming, drugged, drunk, daydreaming.
He probably loves to portay to us about the other worlds, to bring to us what those people see in that state, and what that world is about. Most of it could be what HE thinks, while he is meditating.
A lot of dreams dont make sense, they are just random things, some we pick up from what we see in the waking life, and others just our thoughts, dreams and even things we DONT see/think about when we are awake, and think about only we are sleeping or drugged, since in that state/world, we have the power to do anything we wany, as long as we are powerful enough to.
Becuase sometimes, in lucid dreams, when we want to fly, we can, but then we just fall down and cant fly again, or run faster.
So, I think he puts those random things too, since they are random in dreams, which is why they are important.
Keep in mind, he has been doing art, and a lot of times, we paint/draw things that just come out of the head out of nowhere and we have no idea what it is. Which we see in most of the abstract art. I've studied in art school as well.
A lot of times people just do a painting and then think about what to SAY about it, so most of the time, its just a thought pattern without any concept.
Art doesnt always has to have a strong meaning, and thats where people start to go in a drifted direction, because the images is so strong, that we always think there should be a cool/dark/strange meaning to it.

I went too far, but let me know what YOU think.
What's my point?
My point is... 'the man is doing all this to the people who are in a sleepy/drugged state'
Remember Freddy Crueger? He can only 'use/manipulate/hurt people who are sleeping, and not awake.
Maybe thats what the guy behind the winkies is doing.

About him being Camilla's ghost, that could be a real ghost, or Diane's fear.
Like if we kill someone, especially for the FIRST time, we would be scared as SHIT, and we would always think about them, especially about them RETURNING to us and killing us, since it is a scary thing to do, take someone's life and watch/picture/imagine them dying.