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: The candles on the chandelier that fall on the guards are not real. If you look closely at them they're operated with gas. (01:24:50)
Revealing mistake: As the Wicked Witch chases the four yelling "Seize them," they run around what looks like a concrete pillar. If you look closely it's covered with cloth that moves as they run by. (01:25:00)
Revealing mistake: When the Lion runs out of the Wizard's room, the group disappears because it is an obvious backdrop.
Revealing mistake: As Dorothy skips off on her journey at the very end of the song "Follow the Yellow Brick Road", the shot cuts just in time to prevent her hitting the painted backdrop. The join between the ground and the backdrop is visible.
Revealing mistake: When Dorothy's bedroom is flying away to Oz, there's wind blowing everywhere and bits of hay falling. However, the hay is coming from inside the room, instead of outside, and the papers on the table next to the window don't blow away nor move an inch.
Revealing mistake: When it starts to snow in the poppy field, Dorothy falls asleep, followed by the lion. In many of the later shots, a thin wire attached to the lion is visible the entire time.
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.
Revealing mistake: Throughout the movie, the tin man's costume wrinkles up.
Revealing mistake: When they first meet the Cowardly Lion, he jumps off of a boulder and obviously lands on a trampoline and jumps off.
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.)
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.
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.
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.
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.