I think exercise is the way to go, since it should tone your body as well as make you healthier. You should only gain muscle if you're doing anaerobic exercise, which uses weights and resistance to build muscle at a faster rate than you lose mass, like spinning or weight lifting or walking up steep hills. If you do aerobic exercise instead, with no resistance but lots of repetition (like lifting a 2 pound weight bar 30 times instead of a 10 pound weight bar 5 times) then you should be losing mass as well as toning your muscles without gaining any.
I read a really cool book about it,
Escape Your Shape, written by the guy who divided people into different body shapes - hourglass, ruler, cone (apple), and spoon (pear). And he said that a runner will have a completely different exercise routine to a weight lifter or a swimmer, since they're all trying to add mass to certain parts of their bodies and take it away from others. So he designed four workouts based on the four body types designed to do aerobic exercises for the parts where different people want to lose mass. For the stomach exercises I remember a lot of pilates-like exercises, so I second that idea.
The author also swears by jump roping. It's aerobic so it just reduces mass, but he says it's the only form of exercise proven to reduce cellulite, it burns 23 calories a minute (compared to biking at 10mph which burns 6 a minute, or walking at 4 mph which burns 7 calories a minute), it works out and tones your entire body, and it is also great for your cardiovascular system.