I am pretty sure that I did indeed lose what I thought of as "internal" fat during the first phase of my weight loss. No one noticed that I'd lost weight till I had lost over 50 pounds. Admittedly, I did lose some inches, but not as many as you might expect. It makes sense that once we get up to a certain level of overweight, our organs are probably surrounded by fat. As you say, it's a very good thing for health to lose that weight. If the scale is moving, something good is happening!