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)
Continuity mistake: The yellow brick road is made out of painted bricks. As they enter Oz it changes into shiny linoleum with grey grout marks painted on it. (00:59:25)
Continuity mistake: When Dorothy is talking to the Scarecrow for the first time, the Scarecrow moves further down his pole between close up shots. (00:34:35)
Continuity mistake: In the section just after the Tin Man has been oiled, he drops his axe and starts dancing on the road. After the Witch throws the fire at the Scarecrow, the three of them start down the road to Oz, he has mysteriously picked up his axe. (00:42:45 - 00:47:30)
Continuity mistake: The characters change places from one shot to another as the Wizard gives the Tin Man his heart, etc.
Continuity mistake: The flower pot crown that falls from the Cowardly Lion's head goes from being behind the gang to by the right of them, with no-one touching it. (01:04:38 - 01:05:50)
Continuity mistake: In one of the most endearing scenes from one of the greatest movies of all times, nobody noticed that as Dorothy sings "Over the Rainbow" the haystack she's standing next to just materializes between shots. Later it disappears long before the twister reaches the house. If you watch the movie you'll see the exact spot where the haystack should be seen as Aunt Em gives Dorothy a cruller and says to her, "and find yourself a place where you won't get into any trouble". (00:07:25)
Continuity mistake: As the Tin Man chops open the Witch's door only one piece of wood has fallen off of it. In the next shot when Dorothy comes through there's much more rubble on the floor (in front of and behind the door) than there should be. (01:24:00)
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: 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.
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.