Continuity mistake: You see a Flying Monkey with Toto before he gets picked up. (01:15:30)
Continuity mistake: As the four enter the tower where the Wicked Witch is eventually melted, we see guards and steps on the left of the tower. When seen from above the entrance that the guards use is on the right of the tower. (01:25:35)
Continuity mistake: After she watches the Wicked Witch "melt", Dorothy holds the pail in her hands. She never walks away but if you look closely the pail just disappears from the scene, never to return or be seen again. (01:26:45)
Continuity mistake: At first the Tin Man starts chopping the top part of the Witch's door with his ax and two shots later he's chopping about two feet lower, near the handle. If you look closely when he eventually gets the door open, the top part has not been touched. (01:23:40)
Continuity mistake: Dorothy says to the Good Witch, "Will you help me? Can you help me?" and Toto goes from facing the camera to facing the other way between shots. (01:36:25)
Visible crew/equipment: The Wicked Witch looks at them in the Haunted Forest through her crystal ball and the wires holding Nikko's wings can be seen as they flop around. (01:14:20)
Continuity mistake: Aunt Em puts a compress on Dorothy's head as she returns to consciousness. In the next shot the top is folded differently. (01:39:15)
Continuity mistake: In the Wicked Witch's room, she puts Toto in Dorothy's basket which now has a lid on both sides of it. Later when the boys come to rescue her, Dorothy walks over toward the hourglass, and picks up the same basket and it now has no lids on it (like earlier in the movie). (01:17:20 - 01:23:50)
Continuity mistake: As the Wicked Witch throws her hour glass at them we see behind her as she stands on the balcony, and her broomstick is definitely not anywhere near her. As she runs down the stairs, it's in her hand. (01:24:45)
Continuity mistake: After the Wicked Witch turns the hourglass over and leaves, Dorothy is crying and has wet spots on her dress from the tears. In the next shot her dress is dry. (01:18:05)
Continuity mistake: Dorothy says to herself, "Someplace where there isn't any trouble". If you look closely her hair is blowing in the pre-tornado Kansas wind. In the next shot it isn't. (00:05:25)
Continuity mistake: As the Wicked Witch puts her flaming broomstick on the Scarecrow, look closely at the Tin Man. His chest dent that we saw several shots earlier on the left side of his costume, has been dented out. (01:24:20 - 01:26:15)
Continuity mistake: In the scene when Dorothy taps her ruby slippers together, there is a bow on the toe. When she is walking to Emerald City, her shoes have no bow.
Continuity mistake: The broom that Dorothy gives to the Wizard has never been on fire and the end has been trimmed neatly. (01:28:00)
Revealing mistake: When they first meet the Cowardly Lion, he jumps off of a boulder and obviously lands on a trampoline and jumps off.
Continuity mistake: In Munchkinland, when Dorothy walks the road and everyone sings "Follow the yellow brick, follow the yellow brick road," the angle cuts and a group of Munchkins have suddenly appeared in the center of the previously empty road. Dorothy was standing on the farthest point, so they had half a second to walk 10 meters, which is impossible.
Continuity mistake: The Lollipop Guild teleports all over the scene. As Glinda departs, they are behind Dorothy. As Glinda's bubble rises, several Munchkins run to where she was and wave goodbye, green shirted Lollipop Guilder (Jerry Maren) among them. Cut to Dorothy and Jerry's still behind her. (00:32:40)
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)
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.