Anyone out there know if there is a difference between a 10 1/2 bellhousing and a 11 " bellhousing ? Also which combination is best for racing, 10 1/2 clutch on a 11" bellhousing or use a full 11" clutch. I have heard both ways, the 10 1/2 " will be able to expand better than the 11" ?????

The 11" and 10 1/2" bell housings physically look alike except the 11" is larger at the bottom to accomodate the larger flywheel. You can use an 11" bell housing for an 11" and a 10-1/2" clutch but you can't use a 10-1/2" bell housing with an 11" clutch (14" flywheel). This is speaking in terms of stock parts. In answer to the question of which is better, it all depends on what you want to do with the car. If you have a heavy car you need the extra clamping force and surface area to prevent slipping. Some race cars have smaller diameter flywheels and clutches to keep the rotational mass closer to the center of the crank for quick reving but the clutches are multiple disc for the advantage of more surface area to handle horsepower. The short answer to your question about racing is "It depends on what kind of racing, how heavy is the car and how much horsepower and torque you have". A heavier flywheel will give you more inertia off the line but will be a little slower reving than a lighter flywheel. A lighter flywheel will rev quicker but won't give you as much inertia. The surface area and clamping force of the clutch will determine how much power it can handle without slipping. Top fuel dragsters and funny cars set their clutches up to purposely slip until they build up enough speed to prevent wheel spin. So you see why it's important to know what you want to do with the car before deciding on a clutch.
Keep in mind that the aftermarket has several options to choose from in clutches and flywheels. An example would be that you can buy a 10-1/2" flywheel drilled for an 11" clutch. You can also buy a 12" clutch for an 11" flywheel. Both in just about any weight or material you want for any purpose.
Maybe a little more info than you wanted but it only scratches the surface.
Hope this helps
Jim