Revealing mistake: When Toulon's puppet stage is set on fire, the flames in the foreground look rather like they are projected from a regularly set row of blow torches, rather than erratically flickering flames on a wooden floor. (00:25:05)
Visible crew/equipment: When the general is killed by the six shooter, you can see the cameraman.
Other mistake: Toulon dons two Nazi uniforms to make his escape. But with him as a relatively skinny old man and with his beard (since no Wehrmacht or other Nazi personnel came with nothing more than moustaches), and not to mention being recognizable via the 'Gesucht' ('Wanted') flyers, he would have stuck out like a sore thumb.
Visible crew/equipment: Near the end of the movie, when Major Krause is in his office, when Blade cuts his leg you can see a crew member's hand holding on to him.
Revealing mistake: When Toulon and the puppets start attacking Major Kraus, the weather changes from sunny to stormy back & forth.
Plot hole: In the first film, Toulon fled to America and, when the Nazis found him, committed suicide in 1939. But this movie, effectively the prequel to the franchise, opens in 1941.
Other mistake: When Major Kraus and his substitute driver inspect Lt. Stein's corpse, look closely at Stein's chin and collar. Despite the fact that he should be a corpse by now, Stein is still breathing. (00:37:20)
Answer: This is from a flashback Toulon has to events seen in "Puppet Master II." He's the person who taught Toulon the secret to bringing life to his puppets. This scene is being used to give the audience a little reminder of what happened. (And pad the runtime a few minutes.)
TedStixon