Originally posted by Lennier
At a budget of $500, you're going to sorely limit your digital choices. Then again, your choices of 35mm SLRs are also limited, especially if you have to buy lenses. You ought to consider second-hand stuff.
But if you really cannot increase the budget, I would suggest going digital.
Firstly, with $500, you're probably going to get a plastic SLR with a plastic 35-70 mm lens. Picture quality will greatly suffer. With a low-end digital, say a CP (any at this range?), image quality should be good enough for a 4R or 5R (since these cameras were once geared for high-end consumers)
Secondly, you won't be able to experiment much with your SLR camera (ie. probably no bulb mode, no multiple exposures, etc etc) but with Photoshop, you could turn your pictures into some pretty good art.
Thirdly, the $500 digicam is also likely to be more portable.
Lastly, IMO, the digital workflow is more affordable (low running costs - no need for film processing) and quicker (if you're computer savvy) than the 35mm workflow.