I weighed and had my body fat tested today at the gym ( I know there are many different methods and they all have different reliability, this was using the hand held fat testing computer).

Last time I did that (4-24-06) I weighed 162 and had 35.32 lbs of fat (21.8%), this time I did it and I now weight 158 and have 34.44 lbs of body fat. So, it looks like I have lost 4 lbs in 5-6 weeks but only a lb of it was fat. So, does that mean I likely lost 3 lbs of muscle? I figured with anything since I've been doing some hill runs I would have put on muscle.

Does this sound right? Any suggestions? I need to find time to fit some weight training in as well.

Strength training is a great idea and it is possible to be losing muscle mass if you are not eating well, dehydrated and exercising around your maximal heart rate range. But, the most likely cause is the method in which your body fat was calibrated. Calipers are problematic b/c they depend too much on the skill of the technician, electrical impedance depends on how well your hydrated and different forms of water submersion are probably the most accurate but they still have a list of problems. I would say you are your best judge, if your losing weight, your clothes are looser and you are feeling better and stronger than your doing everything right. Doing strength training 3x week and switching major muscle groups each time is a good way to ensure you do not lose any muscle mass and it has been shown that strength training helps improve weight loss.