a cutout is, well, basically a hole in the pipe somewhere. Mine is in the last bend right under the rear seat on the driver's side, which is why it's so loud inside.
There are two ways to do a cutout:
1) Manufactured cutout. These come both electronically controlled and manually controlled. The electronic ones are by far your best bet if going this route, they are usually extremely well built, don't leak, and are easy as a push of a button to open and close. But they can cost up to 300 smackers. A maunal cutout is cheaper, 45 bucks from JC Whittney, but leak like a sive and are made of cast iron, which requires some skillful 'welding'. They use a cable that you pull from inside the vehicle to open and close. Again, the drawback is quality.
2) Custom cutout. (what I have) Bascially what you do is drill a hole the appropriate size on a bend somewhere easily accessable without a vehicle lift. (under the rear seat on the driver's side for instance) Weld a small section of pipe to an open flange and weld the pipe into the hole you drilled. Then, when you want to close the exhaust and make your car all stealth like again, just bolt on the other end of the flange and you're good to go. A note about the other end of the flange. You're going to have to fill the hole that's in it with something. I had washers of increasingly smaller sizes welded into place to cover the hole. You'll also need to make a gasket to prevent leaks around the union.
Hope this helps, and if you need some pictures, let me know