I often wonder about the muscle vs. fat thing, especially when I hear people say, "I'm afraid to exercise because it'll make me gain weight."
While one pound of muscle weighs exactly the same as one pound of fat, in theory it takes up less space. If you measure these substances by volume - packing one measuring cup with, say, chicken fat, and another measuring cup with, say, chicken meat - and then weigh them on a scale, the fat will weigh less than the meat (muscle).
I've been distressed about having gained 10 lbs in the last six months (largely the fault of overeating when my band was unfilled in December 2008), but I've been exercising a lot and I realized yesterday that I'm still wearing the same clothes. In the past, a 10 pound weight gain would have meant going up a size.
So I think it's entirely possible that I have gained muscle mass, and that's a good thing!