So where does the fat actually go when you lose weight?

I was thinking about this today as I was thinking about how I look forward to the mornings so I can hop on the scale and weigh myself.  I always pee first b/c it makes a big difference.  So where does the actual fat go?  I know that the fat cells are always there, and right now my fat cells are bloated with actual fat and as I lose weight they will shrink.  But where does the actual fat in my bloated fat cells go when they finally DO shrink and I lose weight?  Naturally, I googled it (what DID we ever do without the internet and google?) and found this:
Article
You may have heard that by following a proper diet and exercise program, you can actually turn body fat into muscle. Not true. Fat and muscle are two separate entities. You must burn fat and build muscle.
Here's how fat is burned:
When you lose weight (by eating less and exercising more), an enzyme located in fat cells disassembles the fat compounds and sends the components into the bloodstream. Liver and muscle cells take up these components and disassemble them even further until what's left is a compound called acetyl-CoA. Acetyl-CoA then enters the Krebs cycle, a series of chemical reactions that takes place in the mitochondria -- the cell's "power plant."
The end product is made up of...
• Carbon dioxide, which is expelled when you exhale.
• Water, which is lost as urine and perspiration.
• Heat, which helps maintain body temperature.
• ATP, the molecule that fuels cellular activities that require energy.
On the flip side, to build muscle you need to work those muscles on a regular basis (no pain, no gain)...and eat appropriate amounts of dietary protein. Your protein grams for the day should total about 50% of your body weight in pounds, unless you're a serious athlete, in which case your protein requirements should total about 50-80% of your body weight in pounds
By Joy Bauer, M.S., R.D., C.D.N. - Posted on Mon, Aug 06, 2007, 10:00 pm PDT

Now I would never think that fat turns into muscle - I wasn't looking for that nor the amount of protien I need each day.  I just think the chemical process is amazing and since Anatomy and Chemistry were among my favorite classes in college, I enjoyed knowing exactly how that happens.
On the scale today I was up a lb.  Big deal.  I have no energy and actually laid down this afternoon which is practically unheard of with a Busy Bee 3-yr old who never seems to stop talking much less sit still.  I was *hoping* hubby would be able to join me (wink) but no such luck.  She never stopped talking and playing and walking and talking and running and playing and yelling and dancing and talking and eating and talking and drinking....well, you get the picture.   Have I told you guys my husband is amazing?  He really is and let me be totally lazy for a few hours while he cut the grass and kept the kids occupied.
I had a hard time eating again today, although last night I was able to take a bite of the topping on a piece of pizza and drink a lot.  I got a half of the horsepill antibiotic stuck last night and OUCH it hurt - I could actually feel it go through b/c I felt a sharp pain where my band is, I was totally sick to my stomach and breathing fast like you do when you're about to throw up for real - and then it totally went away and my nausea was instantly gone.  From now on, I'm breaking those suckers up into 4 parts instead of in half!
I tried to eat some cereal this a.m. - it was slow going and I only ate a half cup with milk.  I had some tuna with light mayo for lunch - another half cup - and it took me about a half hour to eat it.  I'm eating some greek yogurt now in effort to pack in the protein.  I'm also drinking mostly milk b/c with the few calories I'm eating, I can certainly afford the calories from the skim milk while getting all the other good stuff from the milk like Vit D and protein (8g in a cup).
My eating plan for this upcoming week will be:  breakfast: Protien shake (30g) 130 cal, Lunch - pureed soup, snack - greek yogurt (14g protein), Dinner - whatever we're having.  I need to find a way to get more water in and I have bottled water stocked in my office.  I also really need to find a way to get green vegetables in.  I'm having trouble with the bulk and fibrousness of most green vegetables and fruits.  I want the antioxidants and vitamins from them.  I don't want to make a smoothie b/c I hate the airbubbles in a blended smoothie.  I did buy some avocados and have been trying to eat those.  The texture is smooth enough.  Anyone have any good tricks or ideas on how to get some good green veggies in?