A "cut" is a substance that has been added to the desired drug. For example, your friendly neighborhood dope dealer only has a half gram of coke, and you want to buy a whole gram. So the dope dealer would take another powdery substance, like baking soda, and mix it in with the coke so it will weigh a whole gram. Thats just one reason to cut a drug.
John and Dave went to a rave, and they had some K. John says "Dave, this shit has a horrible flav, so lets cut it with this red kool-aid and change the tazte." - No I have no future in the rap industry(not that I want one) But that was just to show another reason to cut the drug, many people hate the taste of K dripping down their throats, so they add kool-aid to the mix and try and make it not taste so horrible.