Continuity mistake: When the witch is making her way towards the house a shadow disappears and reappears.
Other mistake: When the witch approaches Dorothy and Glinda, her legs are white, not green.
Continuity mistake: Dorothy's giant lollipop disappears after the witch appears.
Continuity mistake: When Prof. Marvel holds the photograph, his fingers disappear in the close-up.
Continuity mistake: As the Professor is revealed behind the curtain, his right hand is busily working one of the silver levers. A second later, it's working one of the red levers above the big dial.
Revealing mistake: When the Wicked Witch leaves to go to Emerald City on her broomstick, just before she rounds the tower, a couple of thin wires holding her up are visible.
Continuity mistake: When the Wizard is in the balloon, he raises his top hat pointing in an 11 o'clock direction. A frame later it's pointing in a 9 o'clock direction.
Continuity mistake: When the Witch turns the hourglass, the spoon in the mortar behind her moves around between shots.
Continuity mistake: Dorothy arrives at Prof. Marvel's cart and stands very close to the sign on the side. When the angle changes, she is standing several meters behind.
Continuity mistake: When the Witch flies off to Emerald City the monkey is standing by the window sill. The outside angle, where the window and rest of the set are a matte painting, has the Witch superimposed, but not the monkey.
Continuity mistake: When Dorothy and the Scarecrow find the Tin Man and oil his mouth, between shots, the leaves on the Tin Man's shoulders change.
Continuity mistake: In the haunted forest when the Tin Man is levitated then dropped, the tin surrounding his upper left leg gets bent on impact. Later in the movie, the tin is perfectly formed and unbent.
Revealing mistake: When the doorman initially refuses to let Dorothy and friends into the Emerald City, they protest, saying the Good Witch of the North sent her; they show him the ruby slippers as proof. As the camera pans down to the slippers, look at the yellow brick road Dorothy is standing on - it is flat and looks as though it was simply painted.
Revealing mistake: In the forest scene when they walk up to the warning sign, watch and you'll see the Scarecrow's stick bend like rubber.
Revealing mistake: When the Wicked Witch throws the ball of fire at the Scarecrow, you see the Tin Man get down on his knees and take off his hat to put out the fire. If you look really closely, you can see several hairs on the Tin Man's head.
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.