Continuity mistake: As they stand in the Wizard's balloon, Toto is looking at the Cowardly Lion. In the next shot he's growling at a cat. (01:34:45)
Continuity mistake: As he holds the Wizard's balloon, the Tin Man has his heart shaped clock attached to his chest at the sixth rivet. The next time we see him several seconds later it's attached to the third rivet. (01:34:50)
Continuity mistake: At the end when the Wizard and Dorothy are in the balloon basket, the tie down ropes on the right side keep going from tied to untied and back to tied again through different shots. (01:34:55)
Continuity mistake: The Wizard shouts, "I can't come back I don't know how it works" and the Scarecrow is on Dorothy's left. In the next shot he's on her right. (01:35:10)
Continuity mistake: Dorothy says, "Oh, now I'll never get home" and her dress is clean. Several shots later the Tin Man asks, "What have you learned, Dorothy?" and there are now spots all over the front of it that last for the rest of the scene. (01:35:25)
Continuity mistake: When Glinda walks up the steps to greet Dorothy and the rest the floor can be seen and it's quite dirty. Later when Dorothy taps her heels together the same floor has been cleaned and shined. (01:36:15 - 01:38:40)
Continuity mistake: Dorothy says to the Good Witch, "Will you help me? Can you help me?" and Toto goes from facing the camera to facing the other way between shots. (01:36:25)
Continuity mistake: Before she sends her back to Kansas, Glinda's wand is pointing at Dorothy's feet. In the next shot when she says, "Toto too" the wand is in her left hand. (01:37:15)
Continuity mistake: Near the end of the movie, when Dorothy is saying good-bye to the Scarecrow, he is looking at Dorothy and begins to wave good-bye. In the next shot, his head is down and he lifts it slowly and begins to wave. (01:38:30)
Continuity mistake: Aunt Em puts a compress on Dorothy's head as she returns to consciousness. In the next shot the top is folded differently. (01:39:15)
Continuity mistake: When Professor Marvel comes by at the end of the movie Dorothy is holding Aunt Em's hand. In the next shot her hand is on her stomach. (01:39:45)
Continuity mistake: At the end of the movie, when Dorothy is talking to her family, she wraps her right arm around Toto. The shot changes, and her left arm is suddenly around Toto. (01:40:50)
Continuity mistake: Dorothy's hair is long and almost straight in some shots and short and curly when the camera pans back to her. This happens throughout the movie.
Continuity mistake: In the scene where the Wicked Witch in Munchkinland goes over to observe the ruby slippers on her dead sister's feet, when she is up close there's not much space between her and the slippers but when she turns around and says "they're gone," she's further away, then she's closer again in the next shot.
Continuity mistake: While with Professor Marvel, when Toto eats the sausage and Dorothy scolds him, she places her left arm on the basket. A frame later her arm is resting by her lap.
Continuity mistake: When the Lion is singing about being King of the Forest, the Tin Man breaks a flower pot to "crown" him. Pay close attention, as the break marks on the pot change. In one shot there's a big jagged edge sticking up (obviously longer than the others) and in the next shot most of the edges are even.
Continuity mistake: The characters change places from one shot to another as the Wizard gives the Tin Man his heart, etc.
Continuity mistake: When Dorothy asks the Wizard to take her back home, in every close-up of her the Scarecrow disappears from behind, only to reappear in the rest of the shots.
Continuity mistake: When the four are at the end of the hallway to see the Wizard, Toto is near the lion's feet. As it switches shots, he is behind The Tin Man.
Continuity mistake: Throughout the film, if you look at the Wicked Witch's nose, you can see that in some scenes the prosthetic nose is barely longer than Margaret Hamilton's real nose. In other scenes, the tip of her fake nose hooks almost all the way down to her mouth.
Answer: In the film it's left ambiguous. At the end it's strongly implied that she was dreaming. The characters she meets all look like people she actually knows. In the original book, she actually went to Oz.