The formation, structural organization, and barrier functions of stratum corneum (SC) are reviewed. Stratum corneum is considered as a composite material and a biopolymer with properties so unique as to consider it a 'smart material'. SC, together with stratum granulosum (SG) responds (as an actively smart material) to environmental signals with appropriate modulations in its barrier properties. Current theories on the mode of barrier formation, validity of use of animal models and ex vivo human skin in studies of percutaneous absorption, as well as its implications in development of transdermal systems (TDS) are discussed. Potential pitfalls in extrapolating from animal data and the use of cadaver skin/epidermal membranes in evaluations of TDS are also stressed.