Continuity mistake: When the Munchkins start coming out to see Dorothy, one Munchkin comes out of a manhole. But in other wide shots, and when Dorothy leaves to go to Oz, the manhole has totally disappeared. (00:22:25)
Continuity mistake: As Dorothy and the Scarecrow exchange, "How do you dos" the straw coming out of the left side of his shirt triples between shots. (00:35:05)
Continuity mistake: The Tin Man looks at the rope that holds up the chandelier and it's covering the knot. The next time we see it as he takes the axe to it, the rope is on the left of the knot. (01:24:40)
Continuity mistake: As Zeke feeds the pigs we see his hankie sticking straight up out of his back pocket. He doesn't touch it but later before he pulls it out after rescuing Dorothy, it's hanging downward and much more is showing. (00:04:00)
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: If you look at Dorothy's dress, it's wet before she throws the water on the Wicked Witch. In the next shot the water spot (on Dorothy's dress) disappears only to return later when she gets the broomstick. (01:26:20)
Continuity mistake: When Dorothy asks the Wizard to take her back home, in every close-up of her the Scarecrow disappears from behind, only to reappear in the rest of the shots.
Continuity mistake: In a close-up of the Tin Man as Dorothy says, "We were just wondering why," there is no oil on his shoulder joint. In the next shot his shoulder joint is wet. (00:45:40)
Continuity mistake: When the four are at the end of the hallway to see the Wizard, Toto is near the lion's feet. As it switches shots, he is behind The Tin Man.
Revealing mistake: After the witch says "Hey scarecrow, wanna play ball" she throws a fireball at him. But you can see the ground catch on fire before the fireball hits the ground. (00:46:20)
Continuity mistake: Not only does Dorothy's hair change length during the film, it also changes shade. (00:19:40 - 00:22:15)
Character mistake: When Dorothy and the others enter the Haunted forest, the sign reads "Witches Castle One Mile." "Witches" is plural. To be grammatically correct, it should have said "Witch's Castle," if one witch, or "Witches' Castle" if more than one.
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: Dorothy says, "Oh, now I'll never get home" and her dress is clean. Several shots later the Tin Man asks, "What have you learned, Dorothy?" and there are now spots all over the front of it that last for the rest of the scene. (01:35:25)
Other mistake: As they walk through the forest in the shot before Dorothy says, "I don't like this forest" there are some cool digital glitches in the lower left hand corner of the screen which look like a strand of blue Christmas lights blinking on and off. (Restored and re-mastered DVD version only). (00:48:00)
Continuity mistake: At the start of the "lions and tigers and bears, oh my" sequence, Dorothy, the Scarecrow and Tin Man are all standing separately, then the shot cuts and they're suddenly arm in arm. (00:48:45)
Continuity mistake: As Dorothy throws the water on the Wicked Witch the Tin Man goes from holding his ax in front of him to holding it close to his chest with the ax head sideways between shots. (01:26:20)
Continuity mistake: We see the top of the house before the Wicked Witch appears and the right half and chimney are dark. After she appears the lighting has changed and the top of the house is all lit up. (00:45:55)
Visible crew/equipment: As they enter Oz an equipment shadow can be seen moving on the guards back as they pass by with the purple horse pulling them. (01:00:35)
Revealing mistake: Whenever Dorothy, the Scarecrow, the Tin Man, and the Lion go off into the horizon you can see the line on the floor of the sound stage where the fake horizon is and the scene cuts off right as the four get to that point. (00:57:35)
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.