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: When Professor Marvel comes by at the end of the movie Dorothy is holding Aunt Em's hand. In the next shot her hand is on her stomach. (01:39:45)
Visible crew/equipment: As Professor Marvel stands at the window looking at Dorothy and his fingers are curled under the sash. If you look closely they are lit up from underneath, but there's no light on their floor. (01:40:30)
Continuity mistake: At the end of the movie, when Dorothy is talking to her family, she wraps her right arm around Toto. The shot changes, and her left arm is suddenly around Toto. (01:40:50)
Revealing mistake: When the Lion runs out of the Wizard's room, the group disappears because it is an obvious backdrop.
Continuity mistake: Dorothy's hair is long and almost straight in some shots and short and curly when the camera pans back to her. This happens throughout the movie.
Continuity mistake: In the scene where the Wicked Witch in Munchkinland goes over to observe the ruby slippers on her dead sister's feet, when she is up close there's not much space between her and the slippers but when she turns around and says "they're gone," she's further away, then she's closer again in the next shot.
Other mistake: Toto is listed in the end credits as being played by Toto, when he was actually played by a dog named Terry. A few years after the film was released, Terry's owner/trainer, Carl Spitz, changed the dog's name to Toto due to the popularity of the film, but the credit is wrong for the time.
Continuity mistake: While with Professor Marvel, when Toto eats the sausage and Dorothy scolds him, she places her left arm on the basket. A frame later her arm is resting by her lap.
Revealing mistake: As Dorothy skips off on her journey at the very end of the song "Follow the Yellow Brick Road", the shot cuts just in time to prevent her hitting the painted backdrop. The join between the ground and the backdrop is visible.
Continuity mistake: When the Lion is singing about being King of the Forest, the Tin Man breaks a flower pot to "crown" him. Pay close attention, as the break marks on the pot change. In one shot there's a big jagged edge sticking up (obviously longer than the others) and in the next shot most of the edges are even.
Continuity mistake: The characters change places from one shot to another as the Wizard gives the Tin Man his heart, etc.
Continuity mistake: When Dorothy asks the Wizard to take her back home, in every close-up of her the Scarecrow disappears from behind, only to reappear in the rest of the shots.
Continuity mistake: When the Munchkins come out onto the Yellow Brick Road, one of them comes out of a sewer hatch on the yellow bricks. It's located on the ground in front of the first small white cottage with the thatched roof, right behind Dorothy's house. Throughout this scene, the dark hatch is visible whenever we see that specific location, such as when the Wicked Witch of the West asks, "Who killed my sister? Who killed the Witch of the East? Was it you?" but as Dorothy begins to "follow the yellow brick road", there is an overhead shot followed by a front shot and the dark hatch has disappeared.
Continuity mistake: When the four are at the end of the hallway to see the Wizard, Toto is near the lion's feet. As it switches shots, he is behind The Tin Man.
Continuity mistake: Throughout the film, if you look at the Wicked Witch's nose, you can see that in some scenes the prosthetic nose is barely longer than Margaret Hamilton's real nose. In other scenes, the tip of her fake nose hooks almost all the way down to her mouth.
Continuity mistake: After the Tin man opens the door with his axe chopping its wood, Dorothy steps out and the door is totally fixed.
Character mistake: When Dorothy and the others enter the Haunted forest, the sign reads "Witches Castle One Mile." "Witches" is plural. To be grammatically correct, it should have said "Witch's Castle," if one witch, or "Witches' Castle" if more than one.
Revealing mistake: When Dorothy's bedroom is flying away to Oz, there's wind blowing everywhere and bits of hay falling. However, the hay is coming from inside the room, instead of outside, and the papers on the table next to the window don't blow away nor move an inch.
Revealing mistake: When it starts to snow in the poppy field, Dorothy falls asleep, followed by the lion. In many of the later shots, a thin wire attached to the lion is visible the entire time.
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.