Clinical and laboratory studies performed over the past few decades have discovered that dry eye is a chronic inflammatory disease that can be initiated by numerous extrinsic or intrinsic factors that promote an unstable and hyperosmolar tear film. These changes in tear composition, in some cases combined with systemic factors, lead to an inflammatory cycle that causes ocular surface epithelial disease and neural stimulation. Acute desiccation activates stress signaling pathways in the ocular surface epithelium and resident immune cells. This triggers production of innate inflammatory mediators that stimulate the production of matrix metalloprotease, inflammatory cell recruitment, and dendritic cell maturation. These mediators combined with exposure of autoantigens can lead to an adaptive T-cell mediated response. Cornea barrier disruption develops by protease-mediated lysis of epithelial tight junctions leading to accelerated cell death, desquamation, an irregular poorly lubricated cornea surface and exposure and sensitization of epithelial nociceptors. Conjunctival goblet cell dysfunction and death are promoted by the T helper 1 cytokine interferon gamma (IFN-γ). These epithelial changes further destabilize the tear film, amplify inflammation and create a vicious cycle. Cyclosporine and lifitegrast, the two FDA-approved therapies inhibit T cell activation and cytokine production. While these therapies represent a major advance in dry eye therapy, they are not effective in improving discomfort and corneal epithelial disease in all patients. Preclinical studies have identified other potential therapeutic targets, biomarkers and strategies to bolster endogenous immunoregulatory pathways. These discoveries will hopefully lead to further advances in diagnostic classification and treatment.