Continuity mistake: In the first shot of the movie we see Dorothy and Toto running and as she comes to stop he's at her right. In the next shot he's behind her. (00:02:00)
Continuity mistake: When the Scarecrow falls on the yellow-brick road, Dorothy is not wearing her ruby slippers.
Continuity mistake: Back in Kansas, Dorothy holds Toto and her pigtails swap from being behind to in front.
Continuity mistake: As they stand in the Wizard's balloon, Toto is looking at the Cowardly Lion. In the next shot he's growling at a cat. (01:34:45)
Continuity mistake: As she watches the Wicked Witch "melt", Dorothy and the others stand about five feet to the left of the Wicked Witch. They never move but when she asks for the broomstick she's standing right above her "melted" remains. (01:26:50)
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: Dorothy faces the Munchkins as they sing, "We welcome you to Munchkinland". In the next shot she's facing the Mayor. (00:28:30)
Continuity mistake: In the beginning of the movie Dorothy comes running into the farm and starts to, but doesn't completely unfasten the strap around her books. In the next shot the strap is in her hand. (00:02:20)
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: When they first meet the Tin Man, the Scarecrow is holding an apple in each hand. He drops the one in his right hand but the other one disappears when he reaches for the oil can. Later when they all walk away both apples, and the one that Dorothy dropped before, are gone. (00:44:05)
Continuity mistake: The Munchkin Mayor's watch keeps changing time, from nearly to the hour, to twenty after the hour.
Continuity mistake: When we first meet the three farmhands Hunk is leaning on the wagon's break pad. In the next shot he's not. (00:03:05)
Continuity mistake: At the end of the movie, when Dorothy sits up, from the side shot her hair is shown going down her back, but in the front shot, her hair is in the front.
Continuity mistake: When the companions are walking down the corridor to the wizard's room, Toto is on their left side. Then, the camera view suddenly cuts to being behind them, and in which case, Toto is suddenly on their right side.
Continuity mistake: As they all leave the poppy field the artificial snow has been neatly swept off the Yellow Brick road, and all traces of the snow on the ground are gone in the next shot. (00:57:30)
Continuity mistake: As Dorothy walks on the pigsty there are two grown pigs and about eight piglets in there. When she falls in more than 12 grown pigs now appear in the sty. (00:03:55)
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)
Revealing mistake: When the Tinman lands back on the ground, on his lower back, you can see his white t-shirt tucked into his pants. (01:14:10)
Revealing mistake: The glass in Dorothy's bedroom windows don't break, they are removed from their frames as the scene progresses, and if you look at the reflections in them the windows are made of plastic. (00:18:45)
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.