Oh we go through that with Michael as well. He tells some doozies and I think it's a combination of a vivid imagination and an affection for the attention it brings.
The things he says aren't boldface lies but just stories that stretch the truth. For example, a week before Halloween we were told that his teacher wants him to exercise in his costume (this because we said he must wait until the 31st to wear it). This is probably the worst of them so it's quite innocuous.
The way we handled it was to tell him that it sounds like quite a story and we're going to call Ms. Brownlee to talk about it. He'll then shift gears and backtrack...saying he "thought" that's what happened.
We also just call him on it and ask if it's a neat story or the real honest truth. Over time, the stories have subsided and I think it's because he knows we'll call his bluff.

We don't get mad, as I was the exact same way as a child, but we try to help him distinguish the importance between stories and reality.