Continuity mistake: When Dorothy wakes up in Kansas, Prof. Marvel sneaks up in the window behind. Dorothy's pigtails change positions between shots.
Continuity mistake: During the tornado scene, Dorothy gets knocked out by the windows, but right before the house hits the ground, the windows are back and intact.
Continuity mistake: When the Wicked Witch leans down to see the ruby slippers sticking out from under the house, she is pointing down at them, and practically touches them. But in the subsequent shots, she is in her standing spot from prior, pointing between Dorothy and the house.
Continuity mistake: When the witch is making her way towards the house a shadow disappears and reappears.
Continuity mistake: Dorothy's giant lollipop disappears after the witch appears.
Continuity mistake: When Prof. Marvel holds the photograph, his fingers disappear in the close-up.
Continuity mistake: As the Professor is revealed behind the curtain, his right hand is busily working one of the silver levers. A second later, it's working one of the red levers above the big dial.
Continuity mistake: When the Tin Man is levitated and falls to the ground the metal covering his left leg is crumpled up. When we see him again from behind as the flying monkeys attack, the metal covering his leg has never been bent. The metal on his lower back has also been repaired since the fall. (01:14:05 - 01:15:05)
Continuity mistake: If you look at the cracks in the floor, the Wicked Witch's cape moves between shots after she is "melted". (01:26:45)
Continuity mistake: In the haunted forest when the Tin Man is levitated then dropped, the tin surrounding his upper left leg gets bent on impact. Later in the movie, the tin is perfectly formed and unbent.
Continuity mistake: When the Witch turns the hourglass, the spoon in the mortar behind her moves around between shots.
Continuity mistake: Dorothy arrives at Prof. Marvel's cart and stands very close to the sign on the side. When the angle changes, she is standing several meters behind.
Continuity mistake: When the Witch flies off to Emerald City the monkey is standing by the window sill. The outside angle, where the window and rest of the set are a matte painting, has the Witch superimposed, but not the monkey.
Continuity mistake: Dorothy's house is outside of the tornado when we first see it up in the air. Then they are immediately inside the tornado. (00:17:15)
Continuity mistake: When the Wicked Witch tells Nikko "throw that basket in the river and drown him" his feet can be seen resting near her book of spells. In the next shot we see the book of spells back where it originally was to the right of the lamp. (01:16:40)
Continuity mistake: When the Wizard is in the balloon, he raises his top hat pointing in an 11 o'clock direction. A frame later it's pointing in a 9 o'clock direction.
Continuity mistake: Talking to the Wizard the Scarecrow says, "What about the heart you promised Tin Man " and the position of the characters changes between shots. (01:29:15)
Continuity mistake: At the start of the film when Dorothy comes running into the farm calling Aunt Em, Uncle Henry has just taken a chick out of a hat, and is placing it into an open coop. Yet when the shot changes his hand is instantly back in the hat taking out another chick. (00:02:15)
Continuity mistake: In the scene where Dorothy and the Scarecrow first meet and oil the Tin Man, the leaves on the Tin Man's shoulders appear and disappear several times. (00:40:50)
Continuity mistake: When Dorothy and the Scarecrow find the Tin Man and oil his mouth, between shots, the leaves on the Tin Man's shoulders change.
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.