"Olfactory Hallucination" and "Phantosmia" refers to the same olfactory deficit. Affected individuals experience smells that are not physically there. This can be very disturbing, just like a real smell which source is not known can be disturbing.
Phantosmia and olfactory hallucinations have been described in Parkinson disease and psychiatric disorders, after accidents, in epilepsy and migraines, or as an effect from chemotherapy or from recreational drugs. However, very frequently, olfactory hallucinations appear without and other diagnosis.
At least in some cases, there is brain activity that correlates with the experience of the phantom smell (so patients are not simply "lying" about their symptoms). Similar research is also going on to investigate the phenomenon of "phantom legs" in which people with an amputated leg still report sensations from that leg also it is physically impossible.
A possible treatment is (or was) the administration of antipsychiotics that are usually used in patients with schizophrenia, like thioridazine or haloperidol which both were shown in some cases to inhibit the presence of the phantom smells. In extreme cases olfactory halucinations have been treated surgically by surgical excision of olfactory epithelium. Treatment with topiramate, an anticonvulsant, have also been described.
Although these hallucinations can be very unpleasant for those experiencing them, they are very interesting for researchers trying to understand how the sense of smell works. It has, for example, been proposed that the fact that some people who lost their sense of smell still experience specific and identifiable phantom smells shows that the identity of a smell does not depend on what receptors in the nose are activated, but on a higher cognitive function
A nice review paper that discusses all types of olfactory dysfunctions including phantosmia can be found at the Sense of Smell Institute.
In August 2009 there was an interesting essay in the NYTimes written by somebody suffering from phantosmia. There is also a Yahoo! group for people suffering from phantosmia. In 2011, Season to Taste and Remembering Smells, two memoirs by people with problems with their sense of smell have been published.