tell us where you live. Chances are you can do better than ebay if you live in a decent sized city.
I'd spend the bulk of your $500 budget on a materials to build a solid wheelset. IRO hubs, open pros, spokes, cog (s), ring, tubes and tires can cost you $300. I have a couple of really nice freewheel wheelsets that I got off craiglist for <$100 (campy, etc) but If I had to do it again I'd absolutely build a set with a track hub. When you feel funny about building a $300 wheelset to put on a $20 bike remember that the wheelset is probably the only one you'll need for the next 5 - 10 years and you can always put it on a good frame next year when your $500 budget renews. Anyway, while you're waiting for parts, then building wheels, keep on the lookout for a good used bike.

some schwinns are dogs some are great. I have a letour that I love so much I won't ride it in the rain but it's heavy.
I like centurions, univegas, and french bikes (though I wouldn't reccomend the french.)

When I'm looking at frames I tend to look for something light and what I look for are aluminum parts - especially cranks, bars, hubs, and rims (even though you're not going to use them), and if parts are steel, did they try to make them light? I also look at seatstays and chainstays- on heavy bikes they'll be big and chunky, on light bikes they'll be slim and elegant. Somone else might want to chime in on preferable tubing (often advertised on stickers).
Buy a bike for $50 and replace the steel seatpost, bars and padals with aluminum (shop parts bin, nashbar, whatever). Buy some bearings (from loosescrews.com) and overhaul the bottom bracket and headset your self.
You still have $100 to spend however you want.