Continuity mistake: In the beginning while Dorothy is still on the farm, she walks along the pig pen fence and then falls in. When Bert Lahr picks her up out of there her dress is perfectly clean. (00:03:45)
Revealing mistake: When the Wicked Witch scares the Munchkins in Munchkinland, where Dorothy lands, she disappears into a cloud of smoke she creates. But you can see her sneak down into a trap door below. [As a sidenote to this entry, Margaret Hamilton was hospitalized for severe burns after a take of this shot (not the final one used) when the stage elevator got stuck and the explosion went off.] (00:30:45)
Revealing mistake: Soon after Dorothy slaps the Cowardly Lion, she looks as though she is about to laugh out loud. This happens about 10 seconds or so after the slap. She even tries to put Toto in front of her face to cover up her smirking. (00:48:45)
Continuity mistake: When the Wicked Witch scares the Scarecrow, Dorothy, and the Tin Man with fire, after the fire is thrown, not only is the Tin Man's funnel cap on backwards, everything is reversed. In order to keep the characters oriented from left to right correctly, they had to show the film from the wrong side, thus the buttons of the Scarecrow's jacket and everything else are on the wrong side. (00:46:40)
Continuity mistake: After both Dorothy and Scarecrow have oiled Tin Man's elbows, Dorothy pulls the Tin Man's arm down and we see her throw the apple that she's holding down behind him. In the next shot it reappears in her left hand. (00:41:55)
Visible crew/equipment: While Dorothy and the other characters are cornered in the Wicked Witch's castle, when Dorothy grabs the bucket of water and tosses it at Scarecrow's arm, the water hits the Witch. In the closeup of the Witch's face, you can see a crew member's hand (a long sleeve can be seen at the wrist) in the upper left side of the shot. (01:26:20)
Visible crew/equipment: The seams in the floorboard under the Haunted Forest set can be seen several times under the leaves. The best is in the close-ups of Toto. (01:15:30 - 01:19:35)
Visible crew/equipment: There are multiple fragmented reflections of studio lights on Dorothy's bedroom window, as it rips off due to the twister. (00:16:20)
Continuity mistake: When the Munchkins come out onto the Yellow Brick Road, one of them comes out of a sewer hatch on the yellow bricks. It's located on the ground in front of the first small white cottage with the thatched roof, right behind Dorothy's house. Throughout this scene, the dark hatch is visible whenever we see that specific location, such as when the Wicked Witch of the West asks, "Who killed my sister? Who killed the Witch of the East? Was it you?" but as Dorothy begins to "follow the yellow brick road", there is an overhead shot followed by a front shot and the dark hatch has disappeared.
Visible crew/equipment: Near the very beginning, when Dorothy is with Prof. Marvel, after she runs out of his trailer and the wind starts blowing, he follows her and goes towards his horse tied up outside. As he's walking towards the horse, you can see the shadow of a boom mic along his trailer. (00:14:55)
Revealing mistake: After the witch says "Hey scarecrow, wanna play ball" she throws a fireball at him. But you can see the ground catch on fire before the fireball hits the ground. (00:46:20)
Character mistake: When Dorothy and the others enter the Haunted forest, the sign reads "Witches Castle One Mile." "Witches" is plural. To be grammatically correct, it should have said "Witch's Castle," if one witch, or "Witches' Castle" if more than one.
Revealing mistake: When Toto reveals the Wizard by pulling the curtain aside, he doesn't use his mouth; the curtain is tied to the dog. Dorothy can even be seen later removing the rope.
Visible crew/equipment: Studio lights are reflected in the Wicked Witch's large crystal ball, as Dorothy sits down and cries beside it, just before she sees her Auntie in it. (01:15:10)
Visible crew/equipment: When Dorothy walks out of her house in Munchkinland, shadows cast by the trees can be seen on the painted hills right behind them. (00:20:20)
Revealing mistake: In the Haunted Forest, when the Tin Man is lifted up then lands back on the ground, at Tin Man's lower back you can see his white T-shirt tucked into his pants. (01:14:10)
Continuity mistake: Inside the Emerald City, when they are at the palace entrance, the guard's mustache is turned up in the first shot, and is turned down in his next shot. (01:04:45)
Continuity mistake: You see a Flying Monkey with Toto before he gets picked up. (01:15:30)
Revealing mistake: As Dorothy is about to walk into the cyclarama (backdrop) as she leaves MunchkinLand, a Munchkin Soldier on the very far right is too far and becomes transparent with the matted-in flowers. (00:33:40)
Revealing mistake: When they meet the Wizard for the first time, his big projected head doesn't reflect off the shiny floor, like everything else. (01:09:54)
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.