Continuity mistake: In the poppy field, when Dorothy points at the Emerald City, the Lion is standing more than a meter away from her. In the close-up he stands very close to her.
Continuity mistake: In the haunted forest, when the Tin Man is lifted up in the air, the Lion crouches and covers his face with his paws. A frame later he is standing up in a totally different position.
Continuity mistake: Aunt Em places a cold towel on Dorothy's head. The towel is sometimes away from the eyebrow, slightly on top, or completely covering it, depending on the angle.
Continuity mistake: The Lion says, "Read what my medal says," and holds it with his paw. In the close-ups the paw is away and the medal lies flat on his chest.
Continuity mistake: When water falls on the witch, a guard on the left disappears.
Continuity mistake: Dorothy's Aunt hands out some food, walks with her and leaves Dorothy alone. Several meters ahead there's a cart wheel and one chicken. When the angle changes, Dorothy is standing next to the wheel, which is also facing a different position, and there's a lot of chickens around.
Continuity mistake: When the Scarecrow says, "You see, I can't even scare a crow" Toto is nowhere to be seen. Two seconds later he's sitting in Dorothy's lap. (00:36:15)
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: 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)
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: 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: 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)
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.
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.