Long-term, severe sleep deprivation can result in severe illness, hallucinations and death. That doesn’t mean that short-term lack of sleep has no adverse consequences. Recent studies have found that even several days of reduced or shallow sleep can accumulate and resemble the effects of several dozen hours of acute sleep deprivation.
Sleep deprivation increases the risk of obesity, diabetes, and cardiovascular disease, which are among the medical conditions that we try to prevent via regular exercise. Thus, even looking at the short-term, sleep deprivation has significant adverse effects that almost certainly outweigh the benefits of exercise.
The sleep versus exercise question has no black and white answer, since exercise is often beneficial to sleep. Recent findings suggest that, contrary to popular belief, exercising vigorously close to bedtime does not cause insomnia. So my overall feeling is that, given a choice between sleep and exercise, sleep should be given priority.