What is clipping?

Clipping is the technique of cutting away some of the material on the fins of the impeller wheel of the turbocharger.  In other words, to 'clip' a turbo is to make the fins in the exhaust path smaller.  The cut is usually done at an angle of between 10 and 20 degrees - the bigger the angle, the more material is removed from the fins.

This may seem like a dumb thing to do, since smaller fins mean that the exhaust gases will impart less force to the turbine wheel and consequently increase turbo lag.  This is true, but the benefit of clipping is found in the high RPM range of the motor.  At higher RPMs, the turbo may have already surpassed the required user-set boost levels and is not contributing to engine power.

Since the impeller wheel in the exhaust stream partially blocks the exhaust gas flow (by design), it can act as a significant restriction at high RPMs, when the exhaust flow rate is highest.  Clipping the turbo reduces this restriction and allows more air to flow past the turbo wheel at high RPMs, thereby improving airflow through the engine and increasing top-end response.

More details on clipping can be found in a thread on DSMTuners - Exhaust Turbine Clipping