Please tell me this can be normal with increased physical activity. In the past two weeks I have had no weight loss and past few days scale is inching up a little at a time.......2 pounds total. Can this be due to increased muscle tone? Inches are coming off.

It sure can. Also, your body retains water when you exercise to help repair muscles. It can also be TOM. I always gain 2-4 pounds the week before.

This is why I pay way more attention to the tape measure.

Very normal - muscle is heavier than fat - there is a post somewhere here (Mischa's journal???) about what a one pound weight loss can look like (i shall add the link when I can find it) There is also a post about what 1lb of muscle and fat looks like.

another thing you can do is instead of measuring your net weight loss/gain - use a body fat calculator to measure your lean body mass (LBM) increase versus your fat mass(FM) decrease

This is the one I use
http://www.mybodycomp.com/members/login.asp
(You have to register, but its free)

Just to give you some encouragement - I am not exercising heavily - just 30 minutes elliptical trainer 3 x week + some light weights and over the last five weeks I have had no net change, but my body fat has decreased from 34.5 to 32.6, my LBM has increased 2.5KG (5.5 lb) and my FM has decreased the same amount

Hope this helps you to feel you are doing the right thing - whats the point in losing weight if you don't see a change in body shape/size/tone