Inclusions:  which are cracks, clouds, feathers, spots of different colors, bearding, internal graining, knots, cavities, and cleavage within, or on the inside of the diamond.  

Blemishes:  which are scratches, polish lines, grain boundaries, nicks, pits and other defects present on the surface of the diamond.  Although most blemishes don't tend to detract from the overall brilliance, diamonds in category 'I' (and below) may include defects that could seriously alter the overall beauty of the stone.

It's important to keep in mind that no natural diamonds are completely flawless and the ones that come close will be very expensive.  "Museum" or "investment" quality diamonds usually come close to the "FI" category.    

Grading Scale for Clarity
included = inclusions

FI:                  flawless
IF:                  internally flawless
VVS1 & VVS2:   very, very  slightly included
VS1 & VS2:      very slightly included
I1 & I2 & I3:     included

Flaws in the VS2 category and above are usually invisible to the naked eye.  The more inclusions and blemishes a stone has, the less it may sparkle in various settings.  Remember that if you see a stone that is nearly flawless, at a great price, it is most likely a fake diamond.   

If clarity isn't the most important "C" on your list, keep in mind that there are various techniques available to remedy included diamonds.  Laser treatments, which are permanent, and fracture filling, which is semi-permanent, can make less expensive stones look clearer.  Inclusions can also be hidden by the setting.

Clarity is just one of the "4C's" that are most important in a diamond.  Others include color, cut, and carat weight.