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)
Continuity mistake: The Wicked Witch looks over at Dorothy and says, "I can't wait forever to get those shoes" and the metal hand she uses as a book mark rotates 90 degrees in her direction without being touched. (01:18:00)
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: After the Wicked Witch turns the hourglass over and leaves, Dorothy walks back towards her throne. If you look closely the book of spells, which has not been touched, is open to an entirely different page then when we saw it earlier in the scene. (01:18:15)
Continuity mistake: As Toto escapes from the Wicked Witch there's a mortar and pestle to the left of the hourglass. In a close-up Dorothy looks at the hourglass after the Wicked Witch turns it over and we see the pestle has been moved to the other side of the mortar. There will be no confusion about this if you look at the direction of the shadow cast by the hour glass. (01:18:20)
Continuity mistake: When Toto escapes from the witch's castle and runs off to the Tin Man, the Scarecrow and the Lion to lead them to rescue Dorothy, he can be heard barking. As he is running up to the three, he is still barking, but his mouth is quite still and his tongue is hanging out. (01:19:30)
Continuity mistake: When Toto escapes, he runs up to the three putting the Scarecrow back together and the Tin Man has nothing in his left hand. In the next shot the ax appears in his hand. (01:19:40)
Continuity mistake: The clouds behind the side of the mountain don't move an inch in the time it takes Toto to run and get help and return to the same spot. (01:20:00)
Continuity mistake: The Tin Man holds on to the Lion's tail as he reaches the top of the mountain. In the next shot he says, "I hope my strength holds out" and he's back on the side of the mountain. (01:20:00)
Continuity mistake: When trying to escape the Witch's castle, the big doors close, and the gang stands in a line and starts banging on the doors. Between shots, Dorothy and the Tin Man switch sides. (01:21:15)
Continuity mistake: Just before getting crushed by the candle chandelier, the position the Witch's Guards are standing changes between shots. In one shot they're all standing apart, but in the very next shot, they all huddled together in one big group. (01:21:15)
Continuity mistake: At the witch's castle, the witch throws a sand timer to the floor from a banister, and it smashes in front of a large group of her guards. But in the next shot, when the candle chandelier lands on all the guards, you can see that the smashed timer has disappeared. (01:21:20)
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.