Continuity mistake: When Dorothy walks up to the talking apple tree his arms are spread wide apart. In the next shot his left hand is pointing at the apple she picks. (00:39:30)
Continuity mistake: After they enter Oz the collar and scarf of the driver of the horse drawn carriage change between shots without being touched. (01:00:05)
Continuity mistake: When they return to the Wizard with the Witch's broomstick they're standing in front of him in the dark. In the next shot they're in the light. (01:27:30)
Continuity mistake: When the Witch melts, four guards suddenly appear behind her remains.
Continuity mistake: The mayor of the Munchkin city stands alone on the steps and proclaims, "Let the news be spreadÂ…" In the next shot Toto suddenly stands at his left. (00:26:55)
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: The Cowardly Lion stands behind the Tin Man. In the next shot when the guard says, "Hail to Dorothy, the Wicked Witch is dead" the Lion is at the Tin Man's side. (01:27:10)
Continuity mistake: In the first shot of them entering the forest before meeting the Cowardly Lion, Toto is nowhere to be seen. In the next shot he appears walking with them. He disappears again later when we first meet the lion. (00:48:00 - 00:49:10)
Continuity mistake: When they meet the Tin Man, after Dorothy picks up the oil can from the tree stump a leaf appears out of nowhere on it. It reappears and disappears several times. (00:41:15)
Continuity mistake: After the talking trees throw their apples at Dorothy she walks up a small hill and finds the Tin Man. If you look behind her there's a house across the Yellow Brick Road. We just saw this exact same spot in the previous shot as they were being pelted with the apples and the house is not there. (00:40:20)
Continuity mistake: When the Wicked Witch throws the hour glass down at them the monkey on her right runs and hides behind the statue. In the next shot he's back sitting right next to her. (01:24:45)
Audio problem: When the Lion runs out of the Wizard's chamber we hear noises but his mouth is not moving. (01:12:30)
Revealing mistake: As the Wicked Witch chases the four yelling "Seize them," they run around what looks like a concrete pillar. If you look closely it's covered with cloth that moves as they run by. (01:25:00)
Continuity mistake: The Wizard gives the Scarecrow his diploma and he unfurls it. In the next shot as he recites the Pythagorean theorem it's rolled up again. (01:30:05)
Continuity mistake: When the Scarecrow sings, "O my heart all full of pain," he puts both of his hands over his heart. In the next shot, he's dancing and his arms are waving. (00:36:55)
Continuity mistake: When the Wicked Witch tells Nikko "throw that basket in the river and drown him" the knife in front of the basket to the right of the hour glass is pointing right in the direction of the round chain hook embedded in the concrete underneath. The next time we see this knife it has moved 90 degrees in relation to the chain hook, without anyone touching it. (01:16:45 - 01:17:20)
Continuity mistake: When Dorothy arrives in Munchkinland, she hugs Toto, but a frame later her right arm is extended.
Continuity mistake: When the Munchkin in purple tells Dorothy to follow the yellow brick road, Toto runs ahead of Dorothy. In the next shot he's back behind her.
Continuity mistake: The basket that the monkey keeps Toto in is falling apart in the front as a piece of wicker can be seen dangling off of it. After Toto runs away the basket has been turned around and the piece of wicker is no longer there. (01:16:45)
Continuity mistake: You see a Flying Monkey with Toto before he gets picked up. (01:15:30)
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.