Atopic dermatitis is the most common chronic skin disease of young children and is frequently associated with asthma and allergies. Th2-type cytokine secreting T cells expressing the cutaneous lymphocyte-associated antigen play a central role in the induction of local IgE responses and recruitment of eosinophils in this disease. Chronic inflammation in atopic dermatitis likely involves a number of interdependent factors, including repeated or persistent exposure to allergens, which can lead to Th2-cell expansion. In addition, exotoxins secreted by Staphylococcus aureus acting as both superantigens and allergens can contribute to persistent inflammation or exacerbations of atopic dermatitis. Treatment of atopic dermatitis with topical agents such as tacrolimus ointment and phosphodiesterase-4 inhibitors offers new approaches directed at correction of the immune dysfunction associated with this disease.