Well, it's hard to say and depends on how much you want to do with the studio. If you plan on doing the one-man-band thing, you'll need a basic MIDI keyboard and a bunch of VST instruments.
For drums you'll need something that can use .wav files or import other formats like Akai etc... For bass, you'll need a decent sampler if you want to get anything close to a real bass sound. Alternatively, buy a bass guitar for from a pawn shop and mix the two together when necessary.
You can also use a sampler as your drum machine.
If you want to do loops you'll need something like ReCycle... probably one of the best purchases I ever made.
You'll also need a decent mic for vocals... the standard is usually the Shure SM58 or 57.

I found most of the money for the studio goes into VST effects and instruments. For instance you'll need a decent reverb and compressor plus some other goodies like a De-Esser, echo, and a sonic maximizer for harmonies if you want that 'sparkly' sound.
For mixdown and mastering you'll need something that will take all your finished tunes and boost them, eq them and equalize the relative volume from one song to another. There are package products like t-Racks which are hard to learn but once you spend a few months with them you get used to how they work.

You're basically talking a whole lot more than $500 but if you just start with the things you need most and gradually add on, you should do pretty good.

If you just want the basics, all you really need is a guitar, a small mixer, a decent sound card, recording software and a midi keyboard.
For VST stuff get a good vsti synth like Absynth or a sampler like Reason and a decent compressor with a decent microphone.