The disk space is the amount of data you can store on your account. For example if the disk space on your account is 1000MB you can store up to 500 images that are 2MB each.
When the disk space is calculated the sum of files, email and databases is taken into account.
If you exceed that limit you'll not be able to upload more files. You will have to upgrade or delete files to free up space.
To upgrade check this tutorial.