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 Wizard says, "Pay no attention to that man behind the curtain" he pulls the curtain closed and Toto's not there. In the next shot Toto's tied to the curtain again. (01:28:35)
Continuity mistake: When Dorothy first meets the scarecrow, there is a patch of grass in front of the field the scarecrow is in. On the grass there's two beds of flowers. The flowers change colors from when Dorothy meets the Scarecrow, to when the Scarecrow starts his "If only I had a Brain" song. (00:33:00 - 00:35:30)
Continuity mistake: During the storm the farm hands let the horses go and Dorothy runs to the back of the house as the wind blows directly in her face. If you look closely a large wood plank is sent sliding on the road, in the wrong direction into the wind. (00:15:50)
Revealing mistake: When Dorothy first meets the Scarecrow, he is placed up on a wooden stick and you can blatantly see the wire holding him up on it. (00:33:40)
Continuity mistake: Glinda says to Dorothy, "I'm afraid you've made a rather a bad enemy of the Wicked Witch of the WestÂ…" and the mayor of the Munchkin city walks up from behind them. In the next shot he re-approaches them from the left. (00:31:00)
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.
Audio problem: Just before Dorothy lets the Scarecrow down, his lips don't match what he is saying. (00:35:35)
Audio problem: The talking trees throw their apples at Dorothy and the Scarecrow and if you look closely behind the tree on the right, Toto can be seen barking his head off, but we never hear a thing. (00:40:20)
Continuity mistake: When Dorothy first meets the Scarecrow there are no pumpkins on the left side of the Yellow Brick Road. Later when he starts to dance pumpkins have been added. (00:33:55 - 00:36:50)
Continuity mistake: Before Dorothy leaves Munchkinland she has a blue flower in her basket. She never touches the basket but as she dances out of town it's not there. (00:32:55)
Continuity mistake: Near the end of the movie, when Dorothy is saying good-bye to the Scarecrow, he is looking at Dorothy and begins to wave good-bye. In the next shot, his head is down and he lifts it slowly and begins to wave. (01:38:30)
Continuity mistake: As the Munchkins send Dorothy off singing "We're off to see the Wizard" the red coated guard is hanging out of his booth as he waves his sword. In the next shot he's inside the booth tapping time with his sword. (00:33:30)
Continuity mistake: As the Scarecrow yells for "help" in the poppy field, the Tin Man goes from holding the head of his axe to holding his head between shots. (00:56:15)
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)
Continuity mistake: When singing 'Ding Dong the Witch is Dead', in a wide shot, many Munchkins run up to Dorothy, in a big crowd right beside her. But in the next wide shot when the mayor is saying 'From now on you'll be history' the crowd has gone. (00:27:20)
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)
Revealing mistake: When Dorothy runs to the back of the house during the storm a crewmember is moving the rocking chair in the room on the left. The wind never stops blowing, but the chair stops moving after it's left alone. (00:16:35)
Other mistake: In the close-up as the Wicked Witch pets him, Toto, who has been referred to as a "he" throughout the movie appears to be a she. In actuality, Toto is a female Cairn terrier. (01:16:05)
Visible crew/equipment: Dorothy walks around Munchkinland and when we first see the Munchkin's heads popping up the crew's shadow can be seen on the flowers to the right of the screen. (00:20:55)
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.