Diamond clairty is is defined by the amount of surface blemishes and internal inclusions. The fewer blemishes and inclusions, the more valuable the diamond. Inclusions and blemishes do provide one benefit to diamonds though. They can be used to positively identify a diamond since no two diamonds will have the same type and number of inclusions in exactly the same place.
The GIA Clarity Scale
Flawless (FL): Flawless diamonds show no inclusions or blemishes of any sort under 10X magnification when observed by an experienced grader.
Internally Flawless (IF): Internally Flawless diamonds have no inclusions when examined by an experienced grader using 10X magnification, but will have some minor blemishes.
Very Very Slightly Included (VVS1 & VVS2): Very very slightly included diamonds contain minute inclusions that are difficult even for experienced graders to see under 10X magnification.
Very Slightly Included (VS1 & VS2): Very slightly included diamonds contain minute inclusions such as small crystals, clouds, or feathers when observed with effort under 10X magnification.
Slightly Included (SI1 & SI2): Slightly included diamonds contain inclusions (clouds, included crystals, knots, cavities, and feathers) that are noticeable to an experienced grader under 10X magnification.
Included (I1 & I2): Included diamonds contain inclusions (possibly large feathers or large included crystals) that are obvious under 10X magnification and may affect transparency and brilliance.
Some diamonds are referred to as "eye clean" meaning that while they may have inclusions, these inclusions may not be visible to most people without magnification. These diamonds generally fall in the SI1 and better range though SI2 graded diamonds may exhibit similar eye clean characteristics.
Some grading labs have also started to use the SI3 grade to qualify diamonds between SI2 and I1. These diamonds may very well be quality diamonds, but should always be verified by a qualified professional as many tend to be I1 quality diamonds and will not perform as well as the less included diamonds.
Types of Inclusions:
Carbon: A very small black dot on the surface of the stone.
Cloud: Hazy areas within the diamond, actually made up of many small crystals that are impossible to see individually.
Crystals: A small crystalline growth within the diamond. Looks like a small diamond within the big diamond.
Feather: Small cracks within the stone, similar in look to broken glass. Small internal feathers are harmless (other than lowering the clarity rating of the diamond), but large feathers can become a problem because the crack can grow as the diamond ages.
Pinpoint: A very small white dot on the surface of the stone. By far, the most common flaw.