Harry Caul believes he's hallucinating but he isn't
This is a paranoia thriller. Characters in such films are paranoid and have a tendency to lose their grip on reality. Harry Caul is racked with guilt, anger and frustration over the "welfare scandal" of his DC assignment.
He believes the same fate awaits the couple he is currently assigned to bug and seeks to prevent it-- and this paranoia coupled with the guilt is causing him to lose his grip on reality and he knows it. He chalks up the horrific images he sees to his fractured mental state (the bloody hand grasping the window on his hotel room balcony, blood welling up from the toilet etc.)-- Coppola even films these horrific images in a surreal fashion to mislead the audience into believing that Harry is simply hallucinating. But the twist is that he's NOT hallucinating-- but Harry and the audience are led to believe so. The blood actually did well up from the toilet, the murder did take place next door in front of Harry's eyes-- these images are replayed in the climax when it's revealed that Robert Duvall was the one being conspired against.
And that's the twist. A brilliant twist. How many times have we seen in other movies where it's revealed to the audience that certain events that we believe to have occurred are actually figments of the characters' imaginations? Countless times. But The Conversation does the opposite. What the main character (and we the audience) believes are figments of his imagination actually did occur. That's my interpretation. Thoughts?
Religion should be made fun of. If I believed that stuff, I'd keep it to myself. -Larry David