The main objective of the current work is to demonstrate the process of passive lateral diffusion in the human nail plate and its effect on the passive transungual permeation of antifungal drug ciclopirox olamine (CPO). A water soluble dye, methyl red sodium salt (MR) was used to visualize the process of lateral diffusion using a novel suspended nail experiment. The decline in concentration of CPO correlates with that of concentration of MR from the proximal to the distal end of the nail in suspended nail study. Three toenails each were trimmed to 5 mm × 5 mm (25 mm(2)), 7 mm × 7 mm (49 mm(2)), and 9 mm × 9 mm (81 mm(2)) to study the extent and effect of lateral diffusion of the CPO on its in vitro transungual permeation. The permeation flux of CPO decreased as the surface area of the toenail increased. There was a positive correlation between the concentrations of CPO and MR in the area of application and in the peripheral area of the toenails of the three surface areas, confirming the findings in the suspended nail experiment. Profound lateral diffusion of CPO was demonstrated and shown to reduce the in vitro passive transungual drug permeation and prolong the lag-time in human toenails. The study data implies that during passive in vitro transungual permeation experiments, the peripheral nail around the area of drug application has to be kept to a minimum, in order to get reliable data which mimics the in vivo situation.