I was wondering, if you used mp3DirectCut to first cut out a chunk of a song and then use its "Create simple fade" on the last 10 seconds, if it transcodes the file or not. Based on the quick save, I would guess not, but does anyone know just what the program does to the portion of the MP3 that was faded? (I'm working on Lame 3.96 VBR 2 files)

It changes the global gain value of each MP3 frame so that when the MP3 is decoded, the decoder reduces the level of the decoded PCM data by the adjusted amount.

This is a completely lossless operation - it just changes a single 8-bit value in the header of each MP3 frame - with the very minor limitation being that it can only adjust levels in 1.5 dB steps. This means that fades will technically not be as smooth as if you were doing the operation to PCM data in a sound editing program such as Audition, but it usually sounds just fine, and given the fact that the MP3 data is unchanged, it's a small price to pay.