Dermatological diseases range from minor cosmetic problems to life-threatening conditions, as seen in some severe disorders of keratinization and cornification. These disorders are commonly due to abnormal epidermal differentiation processes, which result in disturbed barrier function of human skin. Elucidation of the cellular differentiation programs that regulate the formation and homeostasis of the epidermis is therefore of great importance for the understanding and therapy of these disorders. Much of the barrier function of human epidermis against the environment is provided by the cornified cell envelope (CE), which is assembled by transglutaminase (TGase)-mediated cross-linking of several structural proteins and lipids during the terminal stages of normal keratinocyte differentiation. The major constituents of the stratum corneum and the current knowledge on the formation of the stratum corneum will be briefly reviewed here. The discovery of mutations that underlie several human diseases caused by genetic defects in the protein or lipid components of the CE, and recent analyses of mouse mutants with defects in the structural components of the CE, catalyzing enzymes, and lipid processing, have highlighted their essential function in establishing the epidermal barrier. In addition, recent findings have provided evidence that a disturbed protease-antiprotease balance could cause faulty differentiation processes in the epidermis and hair follicle. The importance of regulated proteolysis in epithelia is well demonstrated by the recent identification of the SPINK5 serine proteinase inhibitor as the defective gene in Netherton syndrome, cathepsin C mutations in Papillon-Lefevre syndrome, cathepsin L deficiency infurless mice, targeted ablation of the serine protease Matriptase/MTSP1, targeted ablation of the aspartate protease cathepsin D, and the phenotype of targeted epidermal overexpression of stratum corneum chymotryptic enzyme in mice. Notably, our recent findings on the role of cystatin M/E and legumain as a functional dyad in skin and hair follicle cornification, a paradigm example of the regulatory functions exerted by epidermal proteases, will be discussed.