Continuity mistake: There's a big mistake when we first see Prof. Marvel's wagon. If you look closely, the entrance steps that can be seen reflecting the light are upside down and would have to be set right before they could walk inside. (00:11:20)
Visible crew/equipment: A large equipment shadow can be seen moving onto the Yellow Brick Road in the long shot as they dance off to Oz after leaving the poppy field. (00:57:40)
Other mistake: The Witch's castle is shown twice, the first time is in the beginning of the scene when Dorothy is held in her room, and the second time is when Toto brings the three back to rescue her. Each time the painting is almost exact, even down to the lights in the windows of the castle. The only thing that changes is the walk way up to the castle, which is entirely different each time. (01:20:10)
Continuity mistake: As she watches the Wicked Witch "melt", Dorothy holds the pail around the front with her arms. In the next shot she's holding it with her hands. (01:26:50)
Visible crew/equipment: Near the end of the movie, Dorothy says to the Wizard, "Oh, will you? Could you?" and the cameraman's shadow is seen on her dress. (01:32:35)
Revealing mistake: Dorothy's bedroom window flies open and the wires pulling it can be seen glistening on the middle right of the screen. (00:17:00)
Continuity mistake: As Toto escapes Dorothy says, "He got away, he got away" and both of her arms are on the ledge. In the next shot her right arm is above her head leaning on the wall. (01:17:40)
Continuity mistake: The Scarecrow is on the left of the Wizard's balloon as he says, "To confer, converse...". In the next shot he's on the right. (01:34:15)
Continuity mistake: In the poppy field when he starts to cry the tin man has a dark oily tear coming down his left eye that disappears in the next shot. (00:55:45)
Continuity mistake: As they walk up to OZ, there are yellow flowers on the wall to their left. As the walk in we see the same spot behind them and the flowers are gone. (01:00:00)
Continuity mistake: As they all leave the poppy field the bricks on the Yellow Brick road run left to right. In the next shot the bricks are at a 90-degree angle, now running lengthwise. (00:57:35)
Audio problem: As the three look down at the entrance to the Wicked Witch's castle the guards in the back are playing drums that are not in synch with what we're hearing on the soundtrack. (01:20:45)
Continuity mistake: When the Tin Man starts chopping the Witch's door his axe has marks all over it. Several shots later he raises it again to chop down another door and it's as new as the day he bought it. (01:23:35)
Continuity mistake: After they meet the Cowardly Lion, the Wicked Witch watches them in her crystal ball. They pass the same rock again that was next to them when they started to sing, "We're off to see the Wizard" and dance down the yellow brick road. (00:53:25)
Visible crew/equipment: As Dorothy walks out of her house in Munchkinland the camera pans right then comes back again and the light from a spotlight dead center that has been bumped can be seen shaking above the blue brook. (00:20:20)
Continuity mistake: When Dorothy says, "No, I just thought you hurt yourself" she takes her hand off the Scarecrow's shoulder. In the next shot her hand is back on his shoulder. (00:36:00)
Continuity mistake: When the Scarecrow falls to the floor after his "If only I had a Brain" song, Dorothy goes to his aid and grabs his arm tight. But in the next shot, her hands are by her side, and she quickly grabs the Scarecrow's hand again, shaking it. (00:36:00)
Revealing mistake: Throughout the movie, you can tell that if the main characters walking into the distance, the "faraway" landscape is a giant matte painting. (00:33:35)
Continuity mistake: Just before the group starts skipping towards the Emerald city, there is snow everywhere, but in the next shot, it's completely disappeared.
Continuity mistake: As the Wicked Witch watches them in her crystal ball Dorothy is holding a hanky in her hand and the oil can is held by the Scarecrow. In the previous shot the oil can is in her hand. (00:57:00)
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.