Hi Andy,
I'm sure you'll get lots of replies to this excellent question - and I encourage other visitors to respond. If you know of links to web resources that answer the question then please post these also!
Now for my 2p, assuming that (given the website) you're going to photograph butterflies ...
I personally started with a non-SLR (which really got me into lepidoptera photography seriously after a break of 15 years!). But then the bug bit. I'm now on my 2nd digital SLR (a Canon 30D). But this is not a cheap option and here's why:
1. The prices quoted for a digital SLR (even on eBay) normally only include the cost of the body.
2. You also need to get at least 1 lens. Preferably, for butterfly photography, a macro lens. This can cost about £250 at its cheapest.
3. You also need some memory. 1Gb can cost £50.
4. You also need batteries.
5. You might want a tripod.
6. ... and now you also need a bag
All in all, I don't see how anyone can get by with less that £1000 for an SLR solution, to be perfectly frank.
Anyway - for £500, the only viable SLR solution that is all-encompassing will, I believe, be found on eBay. Such as a second-hand Canon 350D that includes all of the above. Biut I'm willing to be corrected. And even then, for that price, you'd have to question the condition!
So, my advice is to go for a top-end compact digital, and £500 will get you a long way! This will be more flexible than an SLR (you don't need to buy multiple lenses) and many can be extended with additional lenses anyway (to increase magnification by a factor of 2, for example). The downside is, of course, image quality - but you'd be very surprised at the excellent quality you get from some compact digitals these days!
I'd appreciate other comments on this since it's been a while since I had to make this difficult choice.
Cheers,
- Pete