First I know how the illusion works. Second I know how the quests work. Got the quests and the items are NOT dropping. Period.
The bug with the illusion is this. IF Your toon is bugged and you have say 10k positive faction with all 3. You go into the hole put the illusion on and it changes your faction settings. NOW you kill a few things and you take the illusion off to do the turn ins and all the faction gained has been rest to -50k for all 3 factions. Any and all faction gained BEFORE and DURING the illusion is now gone. So yes I would say starting the hole with decent positive faction and ending it with -50k once the illusion is removed a bug.