Hi Fiona,
I am so sorry to hear about your Grandma's diagnosis, but glad that you can find support and information on this site. I just wanted to offer some thoughts for you to consider.
It is easy for us to assume that someone is hallucinating when they say they see things that don't appear to be there, please remember that people with dementia often 'see' the world around them in a different context to how we do, one of the first skills that is lost is the ability to use logic and reason to make sense of what we see. It may be that what your Grandma is seeing makes perfect sense to her, this is more often an issue of visual perception rather than something simply not being there, if this happens again, ask her to tell you more about what she is seeing and try to look at it through her eyes and reality not yours. Look for shadows or patterns that could be percieved as something else?
Difficulties in recognising family members can also be quite common, this may be due to your Grandma's short term (recent) memory failing so that her strongest memories of your Dad are of a much younger man, hence she may not recognise his face today.
I understand that this can be painful for families to deal with day to day, and hope that you will be able to focus on the good days more than the bad.
best wishes
Cathy