Swap space is an area of the hard disk that serves as an overflow when the computer memory is full. The memory used by inactive applications is partially written out to disk to make room for other applications and for the disk cache for active files.
From the Ubuntu Swap Faq:
Swap space is the area on a hard disk which is part of the Virtual Memory of your machine, which is a combination of accessible physical memory (RAM) and the swap space. Swap space temporarily holds memory pages that are inactive. Swap space is used when your system decides that it needs physical memory for active processes and there is insufficient unused physical memory available. If the system happens to need more memory resources or space, inactive pages in physical memory are then moved to the swap space therefore freeing up that physical memory for other uses. Note that the access time for swap is slower therefore do not consider it to be a complete replacement for the physical memory. Swap space can be a dedicated swap partition (recommended), a swap file, or a combination of swap partitions and swap files.