The walking will definitely count!!
It's the way your clothes fit and feel that matters most, I think. My scales can say I'm 20 stone if they like, but if I'm in size 12s, I'll be happy (ok, that's not realistic but you get what I mean!)
I just wanted to mention, fat does not turn into muscle. I hear it mentioned a lot (my consultant actually said it the other week and I had to bite my lip!) and it's an easy mistake to make. Saying 'fat turns to muscle' is a simple way of illustrating it, but it's not what happens!
You can certainly build muscle through intense exercise, but you have to work really hard to actually gain a pound of muscle. It's some serious exercise. True, muscle does weigh more than fat, so if you lose fat and build muscle, you won't show a loss on the scales. However, I don't think this often happens unless you're doing intensive exercise.
Walking shouldn't do this to you. It will tone your legs nicely, but that's a good thing
I've started running and a for the past few weeks I've been having issues with it - got some really interesting and useful replies from people on here. There are some, like Taz for example, who do a lot of intense exercise and can give you great info if you're interested. have a hunt on here for some messages.
I have totally gone on a waffle and probably not what you wanted to know about, but there we are! LOL!