Alzheimer's disease is a neurodegenerative disorder manifested by cognitive and memory deterioration, impairment of language, and other activities of daily life. Two major pathological hallmarks are characteristics of Alzheimer's disease: intracellular neurofibrillary tangles and extracellular amyloid plaques. The amyloid plaque is mainly comprised of aggregated form of the 40–42 residue amyloid β‐peptide (Aβ). The accumulation and deposition of Aβ eventually lead to neuronal damage and cell death. Aβ peptides are generated from a large precursor protein (APP) by β‐secretase (BACE) and γ‐secretase. Reduction of Aβ by inhibition of γ‐secretase may prevent Aβ‐mediated downstream neurotoxic events, representing an attractive strategy to combat Alzheimer's disease. γ‐Secretase is a multi‐component complex comprised of four distinct units: presenilin, nicastrin, aph‐1, and pen2. In addition to processing APP, γ‐secretase has also been implicated in the cleavage of other substrates, the most notable one being the Notch receptor. Inhibition of Notch processing is the key factor of mechanism‐based side effects associated with γ‐secretase inhibitors. It is imperative to balance the therapeutic efficacy and the risk of mechanism‐based toxicity. Drug Dev Res 70, 2009. © 2009 Wiley‐Liss, Inc.