Over the past decade, great progress has been made toward elucidating the structure and function of the stratum corneum (SC), the outermost layer of the epidermis. SC cells (corneocytes) protect against desiccation and environmental challenge by regulating water flux and retention. Maintenance of an optimal level of hydration by the SC is largely dependent on several factors. First, intercellular lamellar lipids, organized predominantly in an orthorhombic gel phase, provide an effective barrier to the passage of water through the tissue. Secondly, the diffusion path length also retards water loss, since water must traverse the tortuous path created by the SC layers and corneocyte envelopes. Thirdly, and equally important, is natural moisturizing factor (NMF), a complex mixture of low-molecular-weight, water-soluble compounds first formed within the corneocytes by degradation of the histidine-rich protein known as filaggrin. Each maturation step leading to the formation of an effective moisture barrier--including corneocyte strengthening, lipid processing, and NMF generation--is influenced by the level of SC hydration. These processes, as well as the final step of corneodesmolysis that mediates exfoliation, are often disturbed upon environmental challenge, resulting in dry, flaky skin conditions. The present paper reviews our current understanding of the biology of the SC, particularly its homeostatic mechanisms of hydration.