Everything in your body is bound to water, so a good deal of the weight you lose will always, technically, be "water weight."
I've read that, in "normally lean" people, the body will actually up the calorie expenditure to match the calorie input, in the form of simple heat. This could explain those people who can eat 5,000 calories a day and never gain a pound (like my husband). Supposedly, these people's bodies will just "burn" all the excess off.
There's also a theory that some "normally obese" individuals don't have a mechanisms even close to this one. In fact, again supposedly, their bodies show a preference for fat storage rather than metabolism. The really brutal implication of this (which has been shown in lab rats) is while the body "loses weight" it eats away at the organs and other tissues in order to sock away more energy in the fat cells.
Yuck.

Anyway, fat metabolism isn't always as cut and dry as "eat fewer calories," as there are so many biochemical reactions that go into fat storage and metabolism. Insulin causes fat storage, while adrenalin (among others) causes fat metabolism. As your blood sugar gets lower, your cells will tap into fat stores to keep energy constant. Blood sugar goes up, though, and the insulin is released, fat stores are put on lock down and the circulating glucose is trapped wherever possible.
If your blood sugar is low, your cells will release their fat stores, in the form of triglycerides, for use elsewhere. These are broken down into fatty acids and are taken up by other cells. As soon as your blood sugar goes back up, though, the fatty acids are reassembled into triglycerides, which can't be absorbed into non-fat cells, and either float around your blood stream (bad) or are sent back to fat cells. Since the newly packaged triglycerides can't fit into the cells, they have to rely on the circulating glucose, probably because glucose will do more damage to cells in the short term than triglycerides.
As to where it specifically
goes, most is simply burned off as energy (heat) once it's used as fuel for the cells. It's broken down into particles, pieces are used to run the cells and the rest is either metabolically incinerated, recycled or expelled.