And I'd just like to add that - Vanilla Sky is a remake of Abre los Ojos, and both Logan's Run and Total Recall were adaptations of books (well, a short story in Total Recall's case).I can think of several other films and TV series with that premise apart from The Island:
The Prisoner, Logan's Run, Vanilla Sky, Total Recall, The Truman Show and most probably Lost when it reaches a conclusion.
I can think of several books: Destiny's Road by Niven, Man in the High Castle by PKD, Slaughterhouse Five by Vonnegut, Never Let Me Go by Ishiguro. If I thought longer I could come up with many more as it is a very common theme.
If it's a competition then how about Arthur C Clarke's short story 'History Lesson' first published in 1949?I wonder if the earliest example is possibly 'The Tunnel Under the World' by Frederik Pohl, first published in Galaxy magazine in 1955?
Yes, I guess the characters themselves must believe they are in the alternative world.I thought we were doing stories in which the characters discover that they're not living in the world they thought they were?