Continuity mistake: The flower pot crown that falls from the Cowardly Lion's head goes from being behind the gang to by the right of them, with no-one touching it. (01:04:38 - 01:05:50)
Continuity mistake: Inside the Emerald City, when they are at the palace entrance, the guard's mustache is turned up in the first shot, and is turned down in his next shot. (01:04:45)
Continuity mistake: After they put the green robe on the Cowardly Lion, the flowers in the three pots on the right are different that what we saw at the beginning of the scene. (01:05:50)
Continuity mistake: Before he is crowned, the Cowardly Lion has a blue flower next to his left ear. In the next shot it's gone. (01:06:00)
Continuity mistake: During the Lion's king song, the Tin Man breaks a flower pot and places it on the Lion's head as a crown. In the wide shot, the Tin Man's hand is still on the crown, but when it cuts to a closeup of the Lion the Tin Man's hand is suddenly gone. (01:06:00)
Continuity mistake: As the Tin Man crowns the Cowardly Lion watch closely as he flings his ax behind him and it falls off the edge of stage. Two shots later its back again resting on the steps. (01:06:00)
Continuity mistake: When the Tin Man crowns the Lion with the broken flower pot, he places the crown over the right ear, but in the next shot the crown is over the left ear. (01:06:00)
Continuity mistake: As the Tin Man crowns the Cowardly Lion the flowers fall in one piece on the first step to their right. A few shots later we see this same spot again and even though no one has gone near them, the flowers have been moved. (01:06:15)
Continuity mistake: As the four go through the green doors to see the Wizard the hallway triples in length between shots. (01:08:40)
Continuity mistake: Before the four go in to see the Wizard, and as they speak to him, Toto jumps from right to left between shots several times. (01:09:35)
Continuity mistake: The Lion holds the bug sprayer in the crook of his arm as they walk up to the sign in the Haunted Forest. In the next shot he's holding it in his hand. (01:13:10)
Continuity mistake: When the Tin Man is levitated and falls to the ground the metal covering his left leg is crumpled up. When we see him again from behind as the flying monkeys attack, the metal covering his leg has never been bent. The metal on his lower back has also been repaired since the fall. (01:14:05 - 01:15:05)
Continuity mistake: As Dorothy and the rest are chased by the flying monkeys the order of the four changes between shots each time we see them in the overhead shots. (01:15:10)
Continuity mistake: When the Tin Man is attacked by six flying monkeys they take away his axe. Several seconds later he has it again. (01:15:20)
Continuity mistake: You see a Flying Monkey with Toto before he gets picked up. (01:15:30)
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)
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)
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.