...Most importantly, as long as you are losing weight, it's working. You're body won't burn muscle before it burns fat, so if you're losing weight, it's coming from fat stores...
This is a truth with modifications, it actually depends on how you are losing weight, if you are exercising you break down muscles, if you don't get the macro-nutrients needed to replace that muscle breakdown (and energy to rebuild) you will actually loose muscle mass.
A good way to counteract this muscle breakdown is to use creatine and broken chain amino acids, the amino acids are actually what your body is breaking your muscles down into, so the presence of these in your bloodstream will, to some extend, dissuade your body from further breaking down muscle to provide energy while you are exercising.
As for the creatine I haven't understood the exact process but it allows you to store more energy in your muscles, in this way you can last longer before your body begins breaking down your muscles.
Common consensus (I've seen some pretty general experiments, something you'll probably be able to find links to if you dig around bodybuilder forums) is that this is most prevalent with heavy training, but it will also actually manifest without training if your energy deficiency is large enough (a rule of thumb is never go below 500 Kcal below your Daily Energy Intake, although in my mind this limit should be some percentage of your Daily Energy Intake), so if your exercise is moderate and your energy deficiency isn't too severe, most of the weight you drop should be fat.
Although I think I may be nitpicking here, the lesson to take home is: use moderation and consistent measurement methods and see what works for you, just remember: What comes in must either come out again or be stored