Varmit is wrong, whocares is correct: free RAM isn't being used by anything at all, but "inactive" RAM is exactly that--RAM that was previously used by an application, but is now just sitting there.
If the application ends up wanting to use that same information again (you re-launch iTunes, say), then it's already in memory and it goes faster, since no loading from the hard drive needs to occurr. If something else needs that space (you launch Word instead), the stuff there gets instantly thrown out and replaced by Word's data.
Therefore inactive RAM is actually better than free RAM--at least the inactive stuff might have some use, whereas the free stuff is just sitting there doing nothing.
As Nny said, you'll go blind staring at Activity Monitor trying to make something out of nothing. Pageouts are the only issue that really count.
...Y'know, somebody really aught to pin this topic up at the top of this forum permanantly--it seems to get asked about twice a week.