Lupus erythematosus (LE) panniculitis (LEP) is a form of chronic cutaneous LE most often characterized by erythematous subcutaneous nodules. The histopathology of LEP may be distinctive, allowing a diagnosis even in the absence of any other LE features. Lymphocytic infiltration of the panniculus is termed lymphocytic lobular panniculitis. This entity has been reported in both LEP and subcutaneous panniculitis-like T-cell lymphoma. We describe a 67-year-old woman who presented with multiple dermal and subcutaneous nodules on her legs and hips. Biopsy specimens of roughly 15 lesions were interpreted as being diagnostic of LEP, however, with each subsequent biopsy specimen more atypical cells were observed. The patient responded only to moderate doses of oral prednisone, and failed intralesional triamcinolone acetonide, oral immunosuppressive agents, oral antimalarial agents, and oral thalidomide. Three years after the onset of her disease, ulcerated plaques and nodules developed. At this time a T-cell receptor gene rearrangement was present and subcutaneous panniculitis-like T-cell lymphoma was diagnosed. Despite multiple doses of chemotherapy she died approximately 1 year after diagnosis. Patients with apparent LEP that have atypical lymphocytes in their biopsy specimens should be followed up closely for the development of T-cell malignancy.