There is a type of sugar found in human blood; it's called glucose, and it matters a lot how much of it you have circulating in your bloodstream. It's harmful (though rare) to have too little of it; it's also harmful (and common) to have too much of it. People who have too much of it are said to be diabetic.
Glucose is a little like gasoline. It's a high-energy, quick-burning fuel, it's valuable... and it's dangerous. You don't want to run out of it, but neither do you want to leave a bunch of it lying around just anywhere.
Glucose in the bloodstream is valuable, even essential (it's what keeps your brain working, for one thing). The down side of having glucose in your blood is that glucose is a sticky substance, and it attaches itself where it isn't wanted. Specifically, it attaches itself to proteins all over your body. Over the long term, this causes tissue damage.
Fortunately, the body is able to repair the damage that glucose causes, replacing sugar-coated proteins with fresh, new ones. Unfortunately, the body can only repair damage which is happening at the normal, expected rate. If your blood has more glucose in it than it ought to, the damage is accelerated, and the body's repair processes can't keep up. Over time, more and more protein throughout the body becomes encrusted with glucose, more tissue becomes damaged, and eventually a lot of terrible medical problems develop.
To prevent this from happening, the body has a regulatory system which drives the glucose level downward whenever it rises too high. Any failure of this regulatory mechanism causes some form of diabetes, but because there's more than one way for the mechanism to fail, there's more than one type of diabetes.
The regulatory mechanism works by releasing a hormone called insulin. Insulin sends a message to cells all over the body: start absorbing glucose immediately! The cells absorb the glucose from the bloodstream, and convert it to a safe, stable form called glycogen for storage (otherwise the glucose would simply harm the cells from the inside instead of the outside, and nothing would be gained). Because the cells pull in so much glucose from the bloodstream, the glucose level in the blood itself drops back down to normal.
That's how it's supposed to work, anyway. If you have Type 2 diabetes, your cells have become insensitive to insulin, so they don't pick up the message to start absorbing glucose. Or rather, they pick it up, but they don't respond to it adequately. They absorb some glucose, but not as much as they ought to, so the glucose level builds up in the bloodstream. This loss of sensitivity to insulin is usually called "insulin resistance". The causes of it are not clear yet, but it is very strongly associated with obesity and sedentary living. People who lose weight and start exercising usually become sensitive to insulin again.
If you have Type 2, your top priority should be to restore your insulin-sensitivity through exercise and weight loss. You should also moderate your intake of foods which tend to elevate blood glucose. This approach is what will get you the best results. A lot of people try to deal with the disease just by taking diabetes drugs, without doing anything to change their health habits. These people don't do so well.