David Anders   The Computer Guy, Seattle
 
http://support.apple.com/kb/HT1342   Summary Learn how to use Activity Monitor to read System Memory and determine how much RAM is being used. The types of System Memory are: Free, Wired, Active, and Inactive memory. Additionally, learn what Used, VM size, Page ins / Page outs, and "Swap used" mean.

Mac OS X has very efficient memory management. It will automatically allocate memory and adjust the contents of memory as needed.
Note: The term "memory" as used in this article includes high-speed RAM, virtual memory, and swap files on the Mac's drive.
Understanding the Activity Monitor's System Memory tab
Four types of memory appear in the System Memory tab's pie chart: Free, Wired, Active, and Inactive. The sum of the four pie graph slices equals the total amount of random-access memory (RAM) installed in the Mac. RAM is the high-speed memory used to store information that is in use or used most recently. Information in RAM is loaded from the Mac's drive at startup and when applications and documents are opened.

Free:   This is the amount of RAM that's not being used.
Wired:   Information in RAM that can't be moved to the Mac's drive. The amount of Wired memory depends on the applications you are using.
Active:   This information is in RAM and has been recently used.
Inactive:   This information is in RAM but it is not actively being used, it was recently used.
For example, if you've been using Mail and then quit it, the RAM that Mail was using is marked as Inactive memory. Inactive memory is available for use by another application, just like Free memory.  However, if you open Mail before its Inactive memory is used by a different application, Mail will open quicker because its Inactive memory is converted to Active memory, instead of loading it from the slower drive.
Used:   This is the total amount of RAM used.
VM size:   This is the total amount of Virtual Memory for all processes on the Mac.
Page ins: / Page outs:   This refers to the amount of information moved between RAM and the Mac's drive. This number is a cumulative amount of data that Mac OS X has moved between RAM and the Mac's drive. Note: The number inside the brackets shows recent page activity.
Tip: Page outs occur when the Mac has to write information from RAM to the hard drive (because RAM is full).  Adding more RAM may reduce page outs.
Swap used:   This is the amount of information copied to the swap file on the Mac's drive.

Here is an Activity Monitor window with the System Memory tab selected: