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)
Continuity mistake: When the Scarecrow falls to the floor after his "If only I had a Brain" song, Dorothy goes to his aid and grabs his arm tight. But in the next shot, her hands are by her side, and she quickly grabs the Scarecrow's hand again, shaking it. (00:36:00)
Continuity mistake: Just before the group starts skipping towards the Emerald city, there is snow everywhere, but in the next shot, it's completely disappeared.
Continuity mistake: As the Wicked Witch watches them in her crystal ball Dorothy is holding a hanky in her hand and the oil can is held by the Scarecrow. In the previous shot the oil can is in her hand. (00:57:00)
Continuity mistake: After the Scarecrow gets his diploma he says, "How can I ever thank you enough" and the diploma is near his face. In the next shot it's at his side. (01:30:15)
Continuity mistake: When Dorothy grabs the oil can next to the tin man, the leaves he holds in his left hand change positions between shots. A leaf on the log also appears/ disappears randomly between shots.
Continuity mistake: When the Wicked Witch tells Nikko "throw that basket in the river and drown him" The basket with Toto in it moves from one shot to the other in its position to the hourglass. (00:16:45)
Continuity mistake: When Dorothy and the Scarecrow first enter the apple orchard, in long shots, the ground around the trees is brown, barren and furrowed. However, in head shots of Dorothy, the ground appears lush and grass-covered. (00:39:35)
Continuity mistake: In Munchkinland, when the Wicked Witch of the West tries to grab the ruby slippers, the curtain hanging out of the window changes positions between shots.
Continuity mistake: At the Emerald City entrance, the close-up of the shoes shows a straight, thick, brown road on the sides, absolutely nothing to do with the pattern seen in the wide angles.
Continuity mistake: After the Witch leaves, Glinda tells Dorothy, "You may get up, she's gone," and turns to the right. In the next shot, she hasn't turned around yet.
Continuity mistake: The Scarecrow extends his arm holding the heart but in the next shot his arm is down again.
Continuity mistake: After the Witch has melted, the Tin Man turns his head and looks at the Lion. In the next frame he is facing straight.
Continuity mistake: In the farm, after Hunk the farmhand has had his finger smashed, he scolds Dorothy. When she starts to leave, he hammers his hand and takes off his glove, shouting and turning around in pain. The angle swaps to a wide angle and he is working totally calmly with both gloves on.
Continuity mistake: Dorothy arrives home and there's a man fixing a cart whose finger gets smashed. In the wide angle his right hand is on the wheel, but a frame later in the close-up it's not.
Continuity mistake: When the movie begins Dorothy is running and Toto is a meter to the right of her. When she kneels down, he is behind her.
Continuity mistake: The Munchkin with the certificate of death sings that Dorothy is intelligent. He and another munchkin are standing face to face in front of her. Half a second later they are meters away from each other, standing to the side of Dorothy.
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: The house we see in the cyclone has all of it's windows intact. When it lands they're all out. (00:18:40)
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.