>>Does MythTV record the whole show and then just skip commercials while it's playing it back, or
>>does it cut commercials entirely out of the file?
neither. it *tries* to recognize where they are (no, it's not 100% accurate, and far from it last itme i tried) and marks the points where they are. you can then choose to use these points to skip whatever's inbetween them, or to later transcode the file - either to just remove the stuff inbetween the marked points but leave the rest of the file alone, or to compress the original recording and use it outside of mythtv.
personally i just edit the stuff myself...