Mutations in the SPINK5 gene encoding the serine protease (SP) inhibitor, lymphoepithelial-Kazal-type 5 inhibitor (LEKTI), cause Netherton syndrome (NS), a life-threatening disease, owing to proteolysis of the stratum corneum (SC). We assessed here the basis for phenotypic variations in nine patients with “mild”, “moderate”, and “severe” NS. The magnitude of SP activation correlated with both the barrier defect and clinical severity, and inversely with residual LEKTI expression. LEKTI co-localizes within the SC with kallikreins 5 and 7 and inhibits both SP. The permeability barrier abnormality in NS was further linked to SC thinning and proteolysis of two lipid hydrolases (β-glucocerebrosidase and acidic sphingomyelinase), with resultant disorganization of extracellular lamellar membranes. SC attenuation correlated with phenotype-dependent, SP activation, and loss of corneodesmosomes, owing to desmoglein (DSG)1 and desmocollin (DSC)1 degradation. Although excess SP activity extended into the nucleated layers in NS, degrading desmosomal mid-line structures with loss of DSG1/DSC1, the integrity of the nucleated epidermis appears to be maintained by compensatory upregulation of DSG3/DSC3. Maintenance of sufficient permeability barrier function for survival correlated with a compensatory acceleration of lamellar body secretion, providing a partial permeability barrier in NS. These studies provide a mechanistic basis for phenotypic variations in NS, and describe compensatory mechanisms that permit survival of NS patients in the face of unrelenting SP attack.