Revealing mistake: The Wicked Witch throws her hour glass at them and it's guided down to the floor by a wire. If you look closely before it hits the floor sparks start up around it and after it hits it doesn't move or roll, but just sits there. (01:24:45)
Revealing mistake: As the Tin Man holds on to the Lion's tail, the seam in the painted backdrop behind them is very visible going from left to right across the entire sky. (01:20:05)
Continuity mistake: When Professor Marvel comes by at the end of the movie Dorothy is holding Aunt Em's hand. In the next shot her hand is on her stomach. (01:39:45)
Revealing mistake: The wires can be seen behind the Tin Man as he is lifted up in the Haunted Forest. (01:13:55)
Continuity mistake: As Zeke starts to put the feed into the trough there isn't any pig near him. In the next shot a large pig is feeding. (00:04:00)
Continuity mistake: In the shot from behind them, the three look down at the entrance to the Wicked Witch's castle and the Scarecrow picks Toto up in his arms. In the next shot Toto is on a rock barking. (01:21:40)
Continuity mistake: Dorothy walks around Munchkinland and the large lily pads in the pond change positions between shots several times. (00:20:40)
Continuity mistake: When Dorothy, Tin Man, Scarecrow, and Lion are confronting the Wizard behind the curtain, as the Wizard tells Scarecrow that anybody can have a brain, suddenly there are a bunch of flowers (they're not Dorothy's flowers from Munchkinland) set on top of the Wizard's machine. There is no explanation, and you can't see anyone placing them there. (01:28:45 - 01:29:30)
Continuity mistake: When the Wicked Witch of the West asks Dorothy who killed her sister, Dorothy has Glinda's wand across her chest. A shot later Glinda is holding it straight up, away from her.
Continuity mistake: When the group reads the sign in the Haunted Forest, the lion holds the handle of the butterfly net away from his breast. In the next shot it's pressed against it.
Continuity mistake: As Dorothy balances on the pigsty Zeke feeds the pigs. The bucket he passes by on his right is smooth without any ridges on its sides and the bucket he picks up from the bench has a visible indentation about one inch below the rim. He empties the first bucket than picks up the second, which shouldn't have an indentation around it but does. (00:03:55)
Continuity mistake: When the Tin Man crowns the Lion with the broken flower pot, he places the crown over the right ear, but in the next shot the crown is over the left ear. (01:06:00)
Revealing mistake: After Scarecrow bounces off all the fence rails and goes back to do it again, the film is simply being rewound - the fence rails vibrate before the Scarecrow actually hits them. (Deleted scene - which are valid mistakes.)
Continuity mistake: When the cyclone begins, two farmers run to protect the horses. One goes inside the stable and the other runs away. Half a second later he is standing next to the stable's door.
Continuity mistake: The blue Lollipop Guilder scoots up to Dorothy with his hands in his pockets. In the next shot his thumbs are sticking out. (00:28:05)
Continuity mistake: When the group emerges from the woods and is looking at the Emerald City, from the front Toto is about ten or fifteen feet to the left, standing on a rock. It then cuts to Dorothy for just a second, and then to a shot of the group from the back, and Toto is suddenly right behind them. (00:54:35)
Continuity mistake: In the scene where the tornado is forcing everyone into the storm cellar, there is a bench lying on its side. In the next scene, when Dorothy arrives at the cellar, the bench is not only turned in an entirely different position and seems to have gotten bigger, but a wash tub has been placed in front of it.
Continuity mistake: Prior to the Wicked Witch attempting to retrieve the ruby slippers from her sister, Dorothy is seen standing in front of Glinda still holding the lollipop she was given. The camera then turns to the Wicked Witch of the West and when it turns back to Dorothy, the lollipop has disappeared.
Continuity mistake: The length of the bristles in the Witch's broom changes throughout the movie. (00:29:15 - 01:26:10)
Continuity mistake: When Dorothy, Scarecrow, and Tin Man start singing "Lions and tigers and bears. Oh my." they show a close up of Dorothy. She is facing her right in the close-up, but when they show all three, she is facing slightly to her left.
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.