Audio problem: Dorothy yells, "help, help" as she's chased by the flying monkeys but if you look at her mouth she's yelling, "Oh, Oh". (01:15:20)
Revealing mistake: In the scene of the Haunted Forest, when Dorothy is taken away by two of the flying monkeys, you can see that as she's kicking her legs in the air that they are mechanical. The kicking is very stiff and inhuman. (01:15:30)
Visible crew/equipment: The seams in the floorboard under the Haunted Forest set can be seen several times under the leaves. The best is in the close-ups of Toto. (01:15:30 - 01:19:35)
Continuity mistake: You see a Flying Monkey with Toto before he gets picked up. (01:15:30)
Other mistake: In the close-up as the Wicked Witch pets him, Toto, who has been referred to as a "he" throughout the movie appears to be a she. In actuality, Toto is a female Cairn terrier. (01:16:05)
Continuity mistake: As the Wicked Witch says, "It's so kind of you to visit me in my loneliness" a red penknife is on the ledge to their left. In the next shot it disappears. (01:16:10)
Continuity mistake: The Witches bronze astro globe moves from the window sill in different shots of her castle office. (01:16:10 - 01:18:35)
Visible crew/equipment: Dorothy asks the Wicked Witch, "What are you gonna do with my dog? and a stage light shines against the painted backdrop outside her window. (01:16:20)
Continuity mistake: In the Haunted Forest, Toto comes to the Tin-man, Lion and Scarecrow, barking. In a wide shot he is standing on loads of leaves, then in a closeup, he's standing on hardly any leaves, but in the next wide shot, he's standing on lots of leaves again. (01:16:20)
Continuity mistake: Dorothy asks the Wicked Witch, "What are you gonna do with my dog? Give him back to me" and the basket with Toto in it changes from being in the monkey's left hand to his right between shots. (01:16:20)
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 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: 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: As Dorothy stands in front of the Wicked Witch the ruby slippers are protruding over the step. In the next shot they are several inches back from the step. (01:16:50)
Continuity mistake: When the Wicked Witch Tries to take the Ruby slippers from Dorothy it's obvious in the shot from behind that her right sock is pulled higher than her left. In the next shot they're both even. (01:16:50)
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 he escapes Toto runs up the drawbridge and moves a foot to the left between shots than back again. (01:17:30)
Continuity mistake: As Toto escapes Dorothy says, "He got away, he got away" and both of her arms are on the ledge. In the next shot her right arm is above her head leaning on the wall. (01:17:40)
Continuity mistake: When Toto escapes from the castle, jumping over the moat, Dorothy starts crying. A shot later, her right arm is leaning on the wall. (01:17:46)
Continuity mistake: The Wicked Witch leaves Dorothy and runs to grab the hourglass. The mortar and pestle on the left of the hourglass disappear between shots. (01:17:50)
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.