Continuity mistake: When Toto pulls the curtain back to show who the real "Oz" truly is it looks like Toto's collar got snagged or he actually had to bite it but in the next shot he pulls the curtain back so fast that it would've sent Toto flying but then he is connected back to it again.
Continuity mistake: The Wicked Witch of the West's bilious green face colouring changes shades during the film. DVD showing.
Continuity mistake: The strand of straw that the crow pecks from the Scarecrow's lapel was not there before, as shown by previous close-ups. (00:36:00)
Continuity mistake: When Dorothy is holding Toto in the last scene, the dog is facing to the left, but in the very next shot he's suddenly facing to the right.
Continuity mistake: When Glinda starts to sing, a Munchkin is seen coming out of an open sewer with its lid on the side. When the angle changes, the munchkin is nowhere to be seen and the sewer is closed.
Continuity mistake: When the cyclone arrives, the farmhands let out the horses, which run wild through the farm. In the immediate wide angle there's no sign of humans or animals anywhere.
Continuity mistake: When Dorothy extinguishes the fire on the Scarecrow's arm, the Witch keeps swapping between: close, far, next to a window, plain wall; all in a matter of seconds.
Continuity mistake: Miss Gulch rides away on her bike and Toto jumps directly off the back onto the dirt road. There should be tire marks on the dirt where he falls directly behind the bike, but there aren't. (00:10:30)
Continuity mistake: When Hunk hits his hand with the hammer there are two brooms leaning against the barn behind him. In the next shot they're gone. (00:03:45)
Continuity mistake: After the Wicked Witch of the West lights her broomstick and the scarecrow on fire, and Dorothy throws the water on her, in the next shot after the water hits her, you see the broomstick laying next to her burnt out but not smoking. (01:26:20)
Continuity mistake: There's a big mistake when we first see Prof. Marvel's wagon. If you look closely, the entrance steps that can be seen reflecting the light are upside down and would have to be set right before they could walk inside. (00:11:20)
Continuity mistake: As she watches the Wicked Witch "melt", Dorothy holds the pail around the front with her arms. In the next shot she's holding it with her hands. (01:26:50)
Continuity mistake: As Toto escapes Dorothy says, "He got away, he got away" and both of her arms are on the ledge. In the next shot her right arm is above her head leaning on the wall. (01:17:40)
Continuity mistake: The Scarecrow is on the left of the Wizard's balloon as he says, "To confer, converse...". In the next shot he's on the right. (01:34:15)
Continuity mistake: In the poppy field when he starts to cry the tin man has a dark oily tear coming down his left eye that disappears in the next shot. (00:55:45)
Continuity mistake: As they walk up to OZ, there are yellow flowers on the wall to their left. As the walk in we see the same spot behind them and the flowers are gone. (01:00:00)
Continuity mistake: As they all leave the poppy field the bricks on the Yellow Brick road run left to right. In the next shot the bricks are at a 90-degree angle, now running lengthwise. (00:57:35)
Continuity mistake: When the Tin Man starts chopping the Witch's door his axe has marks all over it. Several shots later he raises it again to chop down another door and it's as new as the day he bought it. (01:23:35)
Continuity mistake: After they meet the Cowardly Lion, the Wicked Witch watches them in her crystal ball. They pass the same rock again that was next to them when they started to sing, "We're off to see the Wizard" and dance down the yellow brick road. (00:53:25)
Continuity mistake: When Dorothy says, "No, I just thought you hurt yourself" she takes her hand off the Scarecrow's shoulder. In the next shot her hand is back on his shoulder. (00:36:00)
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.