Revealing mistake: In the scene where the tornado is about to hit and Aunt Em and Uncle Henry are going into the cellar, you can see that some of the trees are blowing around violently, and others aren't moving at all. (00:16:05)
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)
Revealing mistake: As the Tin Man busts down the Witch's door with his ax if you look closely you'll see a slight edit in the film right before he takes his last swing. What they did was unlock the door before the last swing so it would open. You can see the dead bolt retracted as the door swings open. (01:23:50)
Revealing mistake: Dorothy's bedroom window flies open and the wires pulling it can be seen glistening on the middle right of the screen. (00:17:00)
Revealing mistake: Throughout the movie, you can tell that if the main characters walking into the distance, the "faraway" landscape is a giant matte painting. (00:33:35)
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)
Revealing mistake: The wires can be seen behind the Tin Man as he is lifted up in the Haunted Forest. (01:13:55)
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: Right after Dorothy slaps the lion, there is a green smudge on her arm. Looks like the witch's makeup. (00:50:35)
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.