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The recent generation of induced neurons by direct lineage conversion holds promise for in vitro modelling of sporadic Alzheimer's disease. Here, we report the generation of induced neuron-based model of sporadic Alzheimer's disease in mice and humans, and used this system to explore the pathogenic mechanisms resulting from the sporadic Alzheimer's disease risk factor apolipoprotein E (APOE) ɛ3/4 allele. We show that mouse and human induced neurons overexpressing mutant amyloid precursor protein in the background of APOE ɛ3/4 allele exhibit altered amyloid precursor protein (APP) processing, abnormally increased production of amyloid-β42 and hyperphosphorylation of tau. Importantly, we demonstrate that APOE ɛ3/4 patient induced neuron culture models can faithfully recapitulate molecular signatures seen in APOE ɛ3/4-associated sporadic Alzheimer's disease patients. Moreover, analysis of the gene network derived from APOE ɛ3/4 patient induced neurons reveals a strong interaction between APOE ɛ3/4 and another Alzheimer's disease risk factor, desmoglein 2 (DSG2). Knockdown of DSG2 in APOE ɛ3/4 induced neurons effectively rescued defective APP processing, demonstrating the functional importance of this interaction. These data provide a direct connection between APOE ɛ3/4 and another Alzheimer's disease susceptibility gene and demonstrate in proof of principle the utility of induced neuron-based modelling of Alzheimer's disease for therapeutic discovery. [ABSTRACT FROM AUTHOR]