Hallucination happens when a person sees, hears, feels or smells something that is not actually present, otherwise known as the absence of a stimuli (something that influences one to react). For example, the person who is hallucinating may see cars racing right in front of him when in fact nothing is there; or he may hear multiple voices around and yet he is alone; or he may feel that spiders are crawling all over him but there are none at all.
Illusions on the other hand are perceptions, whereas hallucinations are not. As you watch a magician walk through a mirror for instance, your brain creates an assumption that the magician is indeed walking through the mirror, however, it is only a trick. In this case, you just experienced an illusion, a misinterpretation of your true senses. Using the earlier example about the racing cars again, you may have an illusion that the cars are floating as you actually see them pass by.