Continuity mistake: The Lion says, "Read what my medal says," and holds it with his paw. In the close-ups the paw is away and the medal lies flat on his chest.
Continuity mistake: When water falls on the witch, a guard on the left disappears.
Continuity mistake: Dorothy's Aunt hands out some food, walks with her and leaves Dorothy alone. Several meters ahead there's a cart wheel and one chicken. When the angle changes, Dorothy is standing next to the wheel, which is also facing a different position, and there's a lot of chickens around.
Audio problem: After the witch says "Well my little pretty, I can cause accidents too." her mouth starts to move again but nothing is heard.
Continuity mistake: In the scene when Dorothy taps her ruby slippers together, there is a bow on the toe. When she is walking to Emerald City, her shoes have no bow.
Revealing mistake: When they first meet the Cowardly Lion, he jumps off of a boulder and obviously lands on a trampoline and jumps off.
Continuity mistake: In Munchkinland, when Dorothy walks the road and everyone sings "Follow the yellow brick, follow the yellow brick road," the angle cuts and a group of Munchkins have suddenly appeared in the center of the previously empty road. Dorothy was standing on the farthest point, so they had half a second to walk 10 meters, which is impossible.
Continuity mistake: When Toto pulls the curtain back to show who the real "Oz" truly is it looks like Toto's collar got snagged or he actually had to bite it but in the next shot he pulls the curtain back so fast that it would've sent Toto flying but then he is connected back to it again.
Continuity mistake: The Wicked Witch of the West's bilious green face colouring changes shades during the film. DVD showing.
Continuity mistake: When Dorothy is holding Toto in the last scene, the dog is facing to the left, but in the very next shot he's suddenly facing to the right.
Continuity mistake: When Glinda starts to sing, a Munchkin is seen coming out of an open sewer with its lid on the side. When the angle changes, the munchkin is nowhere to be seen and the sewer is closed.
Continuity mistake: When the cyclone arrives, the farmhands let out the horses, which run wild through the farm. In the immediate wide angle there's no sign of humans or animals anywhere.
Continuity mistake: When Dorothy extinguishes the fire on the Scarecrow's arm, the Witch keeps swapping between: close, far, next to a window, plain wall; all in a matter of seconds.
Continuity mistake: When Dorothy is in bed saying "there's no place like home", after the angle cuts the position of her pigtails over her dress has changed.
Deliberate mistake: Before Dorothy is sent to Kansas there's a close-up of her shoes. All of the group's feet, Glinda's dress, and the rest of the elements around are gone and replaced by a black background. Despite being a deliberate directorial decision to give the shoes a more dramatic focus, it is really awkward to see everything disappear, nevertheless.
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: When Dorothy grabs the oil can next to the tin man, the leaves he holds in his left hand change positions between shots. A leaf on the log also appears/ disappears randomly between shots.
Visible crew/equipment: When the Wicked Witch shows Dorothy the hourglass, many stage lights are reflected all over it.
Factual error: Tin doesn't rust.
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.