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)
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)
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)
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)
Continuity mistake: In the scene where the Wizard is about to bestow 'awards', the Scarecrow is lined up second from the left as the Wizard begins to speak. In the next shot while the Wizard is still speaking, the Scarecrow 'jumps' to the far right. (01:29:10)
Continuity mistake: Talking to the Wizard the Scarecrow says, "What about the heart you promised Tin Man " and the position of the characters changes between shots. (01:29:15)
Continuity mistake: There is a multicolored bag on the floor, to the left of Dorothy, when they're speaking to the Wizard and he says, "Anybody can have a brain" that was not there when she pulled the curtain open. (01:29:25)
Continuity mistake: The Wizard gives the Scarecrow his diploma and he unfurls it. In the next shot as he recites the Pythagorean theorem it's rolled up again. (01:30:05)
Continuity mistake: After the Scarecrow gets his diploma he says, "How can I ever thank you enough" and the diploma is near his face. In the next shot it's at his side. (01:30:15)
Continuity mistake: The Wizard holds the Lion's medal in his left hand when he takes it out of the bag. In the next shot it's in his right. (01:30:50)
Continuity mistake: The Scarecrow is on the left of the Wizard's balloon as he says, "To confer, converse...". In the next shot he's on the right. (01:34:15)
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.