It depends on how your heap is organized. You should have a look at how much memory in Gen 0,1,2 is allocated and how much free memory you have there compared to the total used memory.
If you have 500 MB managed heap used but and 50 MB is free then you are doing pretty well. If you do memory intensive operations like creating many WPF controls and releasing them you need a lot more memory for a short time but .NET does not give the memory back to the OS once you allocated it. The GC tries to recognize allocation patterns and tends to keep your memory footprint high although your current heap size is way too big until your machine is running low on physical memory.
I found it much easier to use psscor2 for .NET 3.5 which has some cool commands like ListNearObj where you can find out which objects are around your memory holes (pinned objects?). With the commands from psscor2 you have much better chances to find out what is really going on in your heaps. Most commands are also available in SOS.dll in .NET 4 as well.
To answer your original question: Yes free objects are gaps on the managed heap which can simply be the free memory block after your last allocated object on a GC segement. Or if you do !DumpHeap with the start address of a GC segment you see the objects allocated in that managed heap segment along with your free objects which are GC collected objects.
This memory holes do normally happen in Gen2. The object addresses before and after the free object do tell you what potentially pinned objects are around your hole. From this you should be able to determine your allocation history and optimize it if you need to.
You can find the addresses of the GC Heaps with
0:021> !EEHeap -gc
Number of GC Heaps: 1
generation 0 starts at 0x101da9cc
generation 1 starts at 0x10061000
generation 2 starts at 0x02aa1000
ephemeral segment allocation context: none
segment begin allocated size
02aa0000 02aa1000** 03836a30 0xd95a30(14244400)
10060000 10061000** 103b8ff4 0x357ff4(3506164)
Large object heap starts at 0x03aa1000
segment begin allocated size
03aa0000 03aa1000 03b096f8 0x686f8(427768)
Total Size: Size: 0x115611c (18178332) bytes.
------------------------------
GC Heap Size: Size: 0x115611c (18178332) bytes.
There you see that you have heaps at 02aa1000 and 10061000.
With !DumpHeap 02aa1000 03836a30 you can dump the GC Heap segment.
!DumpHeap 02aa1000 03836a30
Address MT Size
...
037b7b88 5b408350 56
037b7bc0 60876d60 32
037b7be0 5b40838c 20
037b7bf4 5b408350 56
037b7c2c 5b408728 20
037b7c40 5fe4506c 16
037b7c50 60876d60 32
037b7c70 5b408728 20
037b7c84 5fe4506c 16
037b7c94 00135de8 519112 Free
0383685c 5b408728 20
03836870 5fe4506c 16
03836880 608c55b4 96
....
There you find your free memory blocks which was an object which was already GCed. You can dump the surrounding objects (the output is sorted address wise) to find out if they are pinned or have other unusual properties.