Atopic dermatitis (AD) is a pruritic inflammatory skin disease associated with a personal or family history of allergy. The prevalence of AD is on the rise and estimated at approximately 17% in the USA. The fundamental lesion in AD is a defective skin barrier that results in dry itchy skin, and is aggravated by mechanical injury inflicted by scratching. This allows entry of antigens via the skin and creates a milieu that shapes the immune response to these antigens. This review discusses recent advances in our understanding of the abnormal skin barrier in AD, namely abnormalities in epidermal structural proteins, such as filaggrin, mutated in approximately 15% of patients with AD, epidermal lipids, and epidermal proteases and protease inhibitors. The review also dissects, based on information from mouse models of AD, the contributions of the innate and adaptive immune system to the pathogenesis of AD, including the effect of mechanical skin injury on the polarization of skin dendritic cells, mediated by keratinocyte-derived cytokines such as thymic stromal lymphopoietin (TSLP), IL-6, and IL-1, that results in a Th2-dominated immune response with a Th17 component in acute AD skin lesions and the progressive conversion to a Th1-dominated response in chronic AD skin lesions. Finally, we discuss the mechanisms of susceptibility of AD skin lesions to microbial infections and the role of microbial products in exacerbating skin inflammation in AD. Based on this information, we discuss current and future therapy of this common disease.