The process is fairly complex.  Grab a biology book from a use college book
store and you can see the whole chemical breakdown process....

By definition a "calorie" is a unit of energy, measured as the amount of
energy it takes to raise the temp of 1 gram of water 1 degree celcius.  But
the calorie you read on food labels is actually 1 kilocalorie (kcal) which
is the equivilant to 1000 calories, or the amount of energy it takes to
raise 1000 grams of water 1 degree celcius.
Our bodies burn calories through metabolic processes, where enzymes break
the carbohydrates into glucose and other sugars, the fats into glycerol and
fatty acids and the proteins into amino acids. These molecules are then
transported through the bloodstream to the cells, where they are either
absorbed for immediate use or sent on to the final stage of metabolism in
which they are reacted with oxygen to release their stored energy.

When you exercise for a long period of time in order to burn 3500 calories
without replenishing with food (a feat that is very difficult to accomplish
by the way) then your body will turn to its fat (and muscle) stores to begin
metabolizing the "food" for the body to be used by the cells in the body
thru the metabolic process I briefly mentioned above.

But there are other things to consider.   In order to burn 3500 calories, it
is going to take time and energy.   For instance, I can walk 10 miles and
burn about 1200 calories.   So, to burn 3500 calories I'd have to walk 30
miles.  That would take me about 7-8 hours to complete.  Do you think
someone is going to do that without stopping for some refueling in the way
of food or drink?

Also, when I exercise, I drink water, which although it doesn't add calories
and it does help aid the digestion and elimination of waste from the body
(some of that waste being the byproduct of the above mentioned metabolic
process, thus flushing unused *stuff* out of the system).  as the body is
expelling energy, it is requiring extra use of the cells, and the cells will
take on the additional water and fluid and retain that.  So I will not expel
all the water I've drunk, which then means that in the end, I'll be
retaining extra water.  Its not added weight, but it does appear that way if
you step on the scale.

You see, it is highly unlikely that someone would exercise long enough to
burn 3500 calories without stopping for some sort of replinishment that will
affect the scale as soon as you are done with the exercise.

In a very simple sense, nearly the same as when machines burn
fuel - the exhaust has water, carbon dioxide, some pollutants.

Correct.

Carbs and fat burn to water and carbon dioxide.  The CO2 comes out
in the breath.  The water is exhaled, sweated, pissed.

Protein burns to water, carbon dioxide and urea.  The urea is pissed
out.

Carbs and protein yield 4 calories per gram, fat 9 calories per gram.