Just listened to an NPR program about parallels between improvisation techniques and communicating with someone with dementia. The improviser's mantra is "Enter Their World," and that's what you need to do, too, when your loved one with Alzheimer's says something that doesn't make sense. Just enter his or her world and roll with it. Good advice.
The program I heard, This American Life, is worth a listen. You can listen to it here. One interviewee, Karen Stobbe, has a website, In the Moment, that elaborates a bit on embracing whatever reality the person with Alzheimer's presents you with.