Yes, you most likely need to free up some space.
What size is your hard drive, and how much free space do you have left? You can gather this info by selecting your hard drive icon and pressing command-i to bring up the "Get Info" window.
There is only one way to free up space: delete stuff from the hard drive. That's not to say that you can't copy (read: "back up") the data to an external hard drive or some alternate location before deleting it, but in order to make more room on your hard drive, you must remove some of the stuff that's there. More than likely, you have some large movie files, a large music collection, or several gigabytes of photos and/or documents that could stand living on an external hard drive instead of on your boot drive.