Short description of error
The 'Make Duplicates Real' object operator has trouble assigning the correct matrix with complex dupli-groups when also applying the group's hierarchy.
I think it might be applying matrices in the wrong order (ie - scale before rotation)
Exact steps for others to reproduce the error
Please see blend file.
Select the dupli-group instance, Run 'Make Duplicates Real' and tick the Parent and Keep Hierarchy check boxes.