Continuity mistake: Prof. Marvel reaches to open the door of his wagon as he walks Dorothy in. In the next shot the door is already open. (00:12:45)
Continuity mistake: After they first meet him when Dorothy pulls the Tin Man's arm down we see her dress and there's nothing on it. In the next shot there are several wet spots on the front of it. (00:41:55)
Continuity mistake: The Cowardly Lion says, "I'll fight you with one paw tied behind my back, I'll fight you standing on one foot." as he proceeds to put his arm behind his back and lift up his left leg. In the next shot his arm is out in front of him and his leg is on the ground. (00:49:35)
Continuity mistake: Before he is crowned, the Cowardly Lion has a blue flower next to his left ear. In the next shot it's gone. (01:06:00)
Continuity mistake: There are two actresses playing Dorothy (and two dogs playing Toto) as she opens the door to Oz. The first is a stand-in wearing a dull colored dress in order to make it look black and white. After she opens the door and moves out of the way, Judy Garland is who we actually see walking through. Look at the different pleats on the two dresses. (00:19:25)
Continuity mistake: As Dorothy and the rest are chased by the flying monkeys the order of the four changes between shots each time we see them in the overhead shots. (01:15:10)
Continuity mistake: Just before getting crushed by the candle chandelier, the position the Witch's Guards are standing changes between shots. In one shot they're all standing apart, but in the very next shot, they all huddled together in one big group. (01:21:15)
Continuity mistake: When Dorothy runs to the back of the house during the storm the field in the background is not the same as we saw a few shots earlier as Aunt Em calls for her. (00:15:35 - 00:16:45)
Continuity mistake: The Scarecrow is in the lead as the four run away from the guards and enter the tower where the Wicked Witch is eventually melted. In the next shot the Tin Man is in front. (01:25:35)
Continuity mistake: When Dorothy walks up to the apple tree, the apple that she picks off of it, in the next shot is not there and after she picks the apple the remaining apples above her head disappear in the next few shots without being touched. (00:39:30)
Continuity mistake: When Dorothy first walks on the pig sty the piece of wire that tangles around her foot is dead center right between the two fence posts. When we eventually see her fall in, the wire has been moved about a foot to the right. (00:04:00)
Continuity mistake: Before they meet the Cowardly Lion, Dorothy starts to say "Lions and Tigers and Bears" and the axe jumps from the Tin Man's left hand to his right between shots. (00:48:20)
Continuity mistake: When the Lion, the Scarecrow, and the Tin Man are chopping down the witch's door to free Dorothy before the hourglass runs out, they are dressed in the guards' uniforms. We see the axe hit the door, and in the next wide shot they are not in the uniforms. There is a slight view of the uniforms in a pile on the floor, as if the trio had changed out of them between axe blows. (01:24:00)
Continuity mistake: Before the four go in to see the Wizard, and as they speak to him, Toto jumps from right to left between shots several times. (01:09:35)
Continuity mistake: When Dorothy first walks around Munchkinland, the bright ruby slippers are seen sticking out under the right window of the house. Later when the Munchkins come out we see the same spot again and the slippers aren't there. (00:20:40 - 00:23:15)
Continuity mistake: The bows in Dorothy's hair are tied differently throughout the scene with Glinda the witch in Munchkinland. (00:19:40 - 00:21:30)
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: In the beginning of the movie Miss Gulch parks her bike on the fence in front of the Gale's house and it's obvious that the fence continues in the same direction past the gate. When Dorothy comes back during the storm the fence now curves around right after the gate. (00:08:15 - 00:15:25)
Continuity mistake: As they enter the scene with the Cowardly Lion, the Scarecrow falls and then jumps over a patch of weeds growing in the middle of the Yellow Brick Road. In the next shot he does the exact same thing only about three feet behind the patch of weeds that he jumped over before. (00:48:00)
Continuity mistake: After the Tin man opens the door with his axe chopping its wood, Dorothy steps out and the door is totally fixed.
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.