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)
Continuity mistake: If you look at Dorothy's dress, it's wet before she throws the water on the Wicked Witch. In the next shot the water spot (on Dorothy's dress) disappears only to return later when she gets the broomstick. (01:26:20)
Continuity mistake: As Dorothy throws the water on the Wicked Witch the Tin Man goes from holding his ax in front of him to holding it close to his chest with the ax head sideways between shots. (01:26:20)
Continuity mistake: After the Wicked Witch of the West lights her broomstick and the scarecrow on fire, and Dorothy throws the water on her, in the next shot after the water hits her, you see the broomstick laying next to her burnt out but not smoking. (01:26:20)
Continuity mistake: As the Wicked Witch is melting the peak of her hat stays intact. In the very next shot it has been flattened. (01:26:45)
Continuity mistake: After she watches the Wicked Witch "melt", Dorothy holds the pail in her hands. She never walks away but if you look closely the pail just disappears from the scene, never to return or be seen again. (01:26:45)
Continuity mistake: If you look at the cracks in the floor, the Wicked Witch's cape moves between shots after she is "melted". (01:26:45)
Continuity mistake: As she watches the Wicked Witch "melt", Dorothy and the others stand about five feet to the left of the Wicked Witch. They never move but when she asks for the broomstick she's standing right above her "melted" remains. (01:26:50)
Continuity mistake: As she watches the Wicked Witch "melt", Dorothy holds the pail around the front with her arms. In the next shot she's holding it with her hands. (01:26:50)
Continuity mistake: The Cowardly Lion stands behind the Tin Man. In the next shot when the guard says, "Hail to Dorothy, the Wicked Witch is dead" the Lion is at the Tin Man's side. (01:27:10)
Audio problem: After the Wicked Witch of the West is liquidated, the soldiers hail Dorothy. After Dorothy asks for the broom, they are heard hailing her again, but none of their mouths move. As the scene fades into the next one, the soldiers' mouths can be seen beginning to move to say the line. (01:27:20)
Continuity mistake: When they return to the Wizard with the Witch's broomstick they're standing in front of him in the dark. In the next shot they're in the light. (01:27:30)
Continuity mistake: The broom that Dorothy gives to the Wizard has never been on fire and the end has been trimmed neatly. (01:28:00)
Visible crew/equipment: When the Wizard says, "Do you presume to criticize the great Oz?" look closely at the curtain as a crew member behind the curtain attaches it onto Toto so he can pull it open. (01:28:20)
Continuity mistake: When the Wizard says, "Think yourselves lucky because I'm giving you an audience tomorrow instead of 20 years from now" his hand is on the silver lever on the floor. In the next shot they are above his head. (01:28:25)
Continuity mistake: When the Wizard says, "Pay no attention to that man behind the curtain" he pulls the curtain closed and Toto's not there. In the next shot Toto's tied to the curtain again. (01:28:35)
Other mistake: As the Wizard is pulling his curtain closed, he says the famous, "Pay no attention to that man behind the curtain," in a loud, booming voice. But he's turned 180 degrees away from his microphone, which we see a second later needs to be right in front of his mouth to make the booming voice effect. (01:28:40)
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 Dorothy is at the end of the movie confronting the Wizard about going home, after Toto opens the curtain Dorothy goes over there and automatically has him in her arms - she didn't bend down and pick Toto up. (01:28:55)
Continuity mistake: In the scene when they discover the Wizard behind the curtain there is a change in the equipment on his wall. At first the big lit up gauge thing with the two levers above it is lit, about a minute later when the Scarecrow gets his diploma the angle has changed and the gauge thing is dark. (01:28:55 - 01:29:55)
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.