How does hail form?

Inside of a thunderstorm are strong updrafts of warm air and downdrafts of cold air.

A water droplet can be picked up by the updrafts and carried well above the freezing level. With temperatures below 32F, the water droplet freezes.

As the frozen droplet begins to fall, carried by cold downdrafts, it may thaw as it moves into warmer air toward the bottom of the thunderstorm.

But the little half-frozen droplet may also get picked up again by another updraft carrying it back into very cold air and re-freezing it. With each trip above and below the freezing level the frozen droplet adds another layer of ice.

Finally, the frozen water droplet with many layers of ice - much like the rings in a tree - falls to the ground - as hail!

From http://www.erh.noaa.gov/er/cae/svrwx/hail.htm