How much can muscle gain REALLY offset weight loss

I also posted this on the "Triathlon Talk" forum.  I'm just feeling really impatient and curious today.

OK. Here's my story. In 1999 I lost about 40 pounds (235 to 195). I did it by walking, and later running, regularly and watching what I ate. I stopped running after 9 months, and by 2003 I had gained most of the weight back.

In June of 2003 I started swimming. I slowly started losing weight.

Then in summer of 2004 I took up cycling. I lost more weight. I didn't diet. But I exercised more than ever in my whole life. Now I'm down to 205.

Though I've measured my progress by performance on the road and in the pool, rather than on the scale, I seem to be stuck at this weight. But when I look in the mirror, I seem less fat than I did at 195. Or so it seems.

People have told me "Oh, well you've gained muscle."

I'm reluctant to agree with them because I've always seen that as a cop-out for overweight body builders. When I was in the Air Force, and the First Sergeant would tell a guy he needed to lose weight, often the guy would start going to the gym and lifting weights, and continue to drink as much beer and eat as muchf fast food as before. At his next weigh in, his alibi for gaining weight would be "well, I've been working out. That's muscle."

My question is this: Is the whole "muscle gain offsets weight loss" a myth, or can a person actually reduce their body fat but not lose as much weight due to gaining muscle mass. In other words, If I'm swimming and / or cycling 5 to 10 hours per week over a period of a year and a half, will I have gain engough muscle mass to make the resulting weight loss less apparent?

I'm really curious about this.