I have to disagree with icemoose. Lets say that person 1 exercises while on SS - burns 500 calories per day bicycling (as I do) and consumes 400 or so. Net loss: 2100 calories, as my normal metabolism is around 2000 calories. Yes, said person will carry some weight in muscles due to water due to glycogen (not exactly accurate, but in line with what icemoose said). Person 2 doesn't exercise while on SS, but begins as she starts increasing up to maintainance. Said person will gain wait when they start exercising due to said process. Both people lose weight, looking at pure energy equations person who exercises will lose more per week, as they have a greater calorie deficit. Person 1 will also not put on the (meager) amount when they start exercising, although they may notice less water weight loss at the beginning. And water is water, you'll put it on again anyway when you start working up the stages!
I can explain this with all the technical bells and whistles if you wish, but I hope that I have described it adequately.
The danger with exercising while having a low calorie intake is that your body starts burning protein (from muscles (INCLUDING THE HEART)) as well as fat. This is one of the reasons that anorexic people have a tendancy to heart failure.
Note about starvation mode: Many people believe it's a load of codswallop. It's true that you burn less calories as you lose weight, but that's partially because of lost muscle mass (you can't avoid losing muscle while losing fat unfortunately) - a reason why many yo yo dieters have low metabolisms. But the idea that the body at 1200 calories exactly says "Oh no, I'll have to stop all this life maintaining stuff I'm doing" sounds like a bit of a myth to me. I can't see why it should be the case.
Personal expierence: I cycle a lot, have lost well over 1.5st in 4 weeks (SS), I know thats not a lot compared to some of you, but I started at BMI 29ish and am now just a healthy BMI (24.8). I refuse to be unhealthy just to lose weight.
Sorry if I sound like a bit of a know-it-all, I'm not, but I happen to be studying cytology (cells mechanisms) this semester
Hugs,
Ida