A disputed flag is a flag that was cleared without being considered valid or invalid.
A disputed flag is a flag that was cleared without being considered to be either necessarily valid or necessarily invalid. This typically happens when a user, other than a diamond moderator, performs an action that gives an opposite opinion to the flag (e.g. a "Looks OK" review in the low quality posts review queue contradicts a "very low quality" flag, thus will cause the flag to become disputed). The flag is considered disputed because the Stack Exchange software can't know whether it was the original flag that was incorrect, or the contradicting action.
Flags can also be marked as disputed if they were cleared by a moderator without expressing an opinion on the flag's validity. A disputed flag is considered neither a positive nor a negative for the user who cast it, neither hurting nor helping its caster's flagging record.
For more information, see the FAQ question: What is a disputed flag?