To answer very simply, diamagnetic (as opposed to paramagnetic) means that all of the electrons are in pairs. Paramagnetic means you have a lone electron somewhere that isn't paired up. How this affects magentism is a little more complicated, but essentially the electron spins cancel each other out when they are paired up.
Also, to clarify what you have posted and what Dan responded with... Atomic orbitals are designated as 's', 'p', 'd', 'f'...and so on, while molecular orbitals are designated as 'sigma' and 'pi'.
Water only has single bonds, so we only have 'sigma' molecular orbitals, denoted by the Greek letter 'sigma' or σ.
In molecules we have hybrid orbitals, they are mixtures of atomic orbitals. Also, you said that water has 10 electrons. You are correct, in total there are 10 electrons, but only 8 of them are valence electrons. The molecular orbitals are going to be mixtures of all valence electrons. From the two hydrogens you have two 1s electrons and from oxygen you have two 2s and four 2p electrons, for a total of eight valence electrons available for filling the hybrid molecular orbitals.
Also keep in mind that anti-bonding orbitals don't form bonds, if you have enough anti-bonding orbitals filled in a molecule, that molecule won't exist. In water we only have bonding molecular orbitals that are filled. In the molecular orbital diagram, everything below the center line is bonding, everything above is anti-bonding. The height of the orbital indicates the relative energy of that orbital. Electrons flow 'down-hill'. Water is stable because it's molecular orbitals that are filled are all lower in energy than if the electrons simple stayed in their hydrogen and oxygen atomic orbitals - this is clearly seen in the molecular orbital diagram above.
Notice on the molecular orbital diagram that two of the filled orbitals are from the oxygen p shell, which has no electrons. This means that all four of those electrons are coming from the oxygen, these are the lone pairs on the oxygen.
Going from the bottom of the molecular orbital (MO) diagram to the top, the orbitals are as follows...
The bottom orbital is composed of a hydrogen 1s and an oxygen 2sp³ atomic orbitals (note where the dashed lines lead to, this MO has 's' and 'p' character from the oxygen). This MO is indicative of a sigma bond between the oxygen and one of the hydrogens and is filled by one electron from each atom.
The second one up is composed only of 2p from oxygen and 1s from hydrogen (the upper 1s, where hydrogen has no electrons). This MO is indicative of a lone pair on oxygen.
Continuing up we see that the next MO is composed like the first MO, it has oxygen 2sp³ and hydrogen 1s (the lower 1s where hydrogen has electrons!). This MO is indicative of the second oxygen and hydrogen sigma bond.
The last filled MO consists of oxygen 2sp³ and the upper 1s hydrogen and again is indicative of a lone pair on oxygen where hydrogen has contributed no electrons.
I hope this explains it a bit better. A very good question, but I agree that this is far beyond high school chemistry. To really explain the nitty-gritty behind molecular orbitals requires some complicated mathematics.