Exercise is great for you regardless of whether you are dieting or not, but I personally feel that it does enhance the weightloss journey, even if you don't see it on the scales you will in your body shape and toneness. Although don't believe the myth about fat turning into muscles, they are two different mediums, you can burn fat and sculpt muscles but you can't convert one to the other, and muscle doesn't weigh heavier than fat, 1lb of muscle weighs the same as 1lb of fat, but muscle is denser. What happens is that when you do weight training, the muscles kinda tear and then they repair themselves when you rest (hence why rest days are equally as important as exercise days) and they repair a little minutely larger and stronger so take up more space - eventually. The more muscle you have the quicker your metabolism, another reason why weight training is really important. Also when you do anarobic exercise (weight training/bearing exercises) your metabolism is raised for longer after finishing then aerobic exercise alone.
I try to train 4 times a week, at the moment, Tuesday AM DVD, Thursday walk on Treadmill, Saturday circuits in the gym, Sunday outdoor walk - as am doing the Moonwalk in 4 weeks. When I finish the moonwalk I change it around to incorporate swimming.