Someone told me today that exercising causes you to retain water. I thought it made you lose water through you sweating. I freely admit I don't know very much about exercise and weight loss yet, so here i am asking the people who would know.

Your friend is somewhat misinformed. When you exercise, water surrounds the muscle/tendons to protect them and help them heal (exercise actually breaks the muscle down and then it rebuilds itself). So technically, yes, your body retains a little water JUST until it's not needed. For most people this is just a couple hours after a workout. So don't weigh yourself at that point.

The mechanism they are (probably) referring to is because of muscle damage acquired through exercise. When you have muscle soreness, it is due to the tiny little tears in the muscle fibers, which, when they heal, makes the muscle stronger.
Overall, it is a good thing, but the muscle damage does tend to pull fluids into the area in order to speed repair (at least in my experience). I have noticed when I lift heavy and have a lot of muscle soreness (like can't sit down kind of soreness), I tend to run 1-3 pounds "heavier" than normal (think days when I do large muscle groups and exercises like squats, lunges, deadlifts, etc...). But when the soreness goes away, so does the weight, and usually I'm right back to normal. In the long run, it's no big deal, because when the muscle heals, it is tighter, stronger and leaner. So I will take the extra fluid because I love lifting!

Thank you Angie & Brandis, it didn't sound quite right what she said, but I am just trying to learn so i wasn't sure.