Above all, don't be frightened. Don't tell the person who is seeing or hearing things that you know what he sees isn't real, because the things are real to him.
The most common hallucinations involve sight or hearing, but people with Alzheimer's may also smell, taste, or feel things that are not really there.
Reassure the person that you will keep him safe. Try to understand the emotion behind the hallucination. If the hallucination is pleasant -- let's say the person is planning a birthday party -- try to connect to her by joining in the fantasy. You do not need to say that you see or hear the same things, but you can accept that the person does.
If it's an upsetting hallucination, try to redirect the person to a different activity. Moving to a different room may help. It's not helpful to try to convince him that his explanation of what's happening is wrong.