Revealing mistake: When Dorothy bumps into the Tin Man, she knocks on his foot, which sounds metallic. However, her fist sinks, revealing it is made of a soft material.
Visible crew/equipment: When the gang runs into the guard at the door, they all walk to the right of the screen to talk to him. While they're walking, you can see the shadow of the boom mic following them.
Revealing mistake: The moment before the Wicked Witch picks up the red hourglass to throw at Dorothy n friends, the flying monkey next to her is suddenly a miniature or reduced in size.
Continuity mistake: During the tornado scene, Dorothy gets knocked out by the windows, but right before the house hits the ground, the windows are back and intact.
Continuity mistake: When the Wicked Witch leans down to see the ruby slippers sticking out from under the house, she is pointing down at them, and practically touches them. But in the subsequent shots, she is in her standing spot from prior, pointing between Dorothy and the house.
Continuity mistake: When the Tin Man tells Dorothy that he was chopping that tree, she starts to turn her head to look at the tree. But then in the jump cut closer, suddenly she's looking back at the Tin Man.
Audio problem: When Dorothy first meets the Scarecrow, you hear Scarecrow talk about the directions, but his mouth doesn't move.
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: Toto runs away from the castle and Dorothy starts to cry. The angle changes and her left arm is now raised and she is also not crying as bitterly as in the previous frame.
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.
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.