In Episode IV: A New Hope, Luke describes Tatooine to C-3PO as: "Well, if there's a bright center to the universe, you're on the planet that it's farthest from." He isn't (only) speaking figuratively; Tatooine lies in the Outer Rim, far from Coruscant and the legal power of either the Republic or the Empire. While the desert planet is important in the Star Wars films because of the characters who live there, as far as the rest of the Star Wars universe is concerned it's merely an insignificant backwater planet.
It may be hard to imagine a Tatooine not overrun by desert. Thousands of years before the formation of the Republic, however, Tatooine was home to a lush jungle and the technologically advanced Kumumgah race. A brutal attack by the Infinite Empire destroyed Tatooine's plant life and oceans, and the heat of the twin suns helped turn Tatooine into a harsh desert.
The Galactic Republic established a human colony on Tatooine, Anchorhead, in 4,200 BBY. While the original settlers soon abandoned the colony, other groups, such as mining operations, moved in to take it over.
In the Star Wars Films
By 65 BBY, the Hutts, a race of criminals and gangsters, had taken over Tatooine. Outside of the rule of the Republic, the Hutts encouraged criminal activity and abuses such as slavery, which was illegal in the Republic. Queen Amidala and Jedi Knight Qui-Gon Jinn encounter one of these slaves, Anakin Skywalker, in 32 BBY.
After Anakin's fall to the Dark Side, Obi-Wan Kenobi took Luke Skywalker to live with his uncle and aunt on Tatooine, then lived as a hermit in the Tatooine desert. The planet's harsh climate contributed to Obi-Wan's premature aging. Tatooine eventually attracted the attention of the Empire when Princess Leia tried to deliver a message to Obi-Wan in 0 ABY. After Luke Skywalker became a galactic hero, Tatooine became quite famous (and a tourist trap).
Jawas and Sand people (or Tusken Raiders) are the two native races of Tatooine, having evolved from the Kumumgah after the planet's drastic climate change. Jawas are short and known for their scavenging (and occasional swindling), while Tusken Raiders are human-sized and known for their violent tendencies. Both races wear clothing that hides their faces and bodies, protecting themselves from the elements.
Humans are also prevalent on Tatooine. Many of them are moisture farmers; collecting enough water to sustain life on such a hot, arid planet is difficult work. Finally, the presence of the Hutts and the distance from the Republic attracts unsavory types of all races to Tatooine.
Behind the Scenes
The name "Tatooine" comes from the city of Tataouine, Tunisia, one of the shooting locations for the desert scenes in A New Hope. The planet is one of the most prevalent locations in the Star Wars films, appearing in every movie except Episode V: The Empire Strikes Back.