An ibook makes an excellent source. Probably even better than my powerbook for one very good reason - no fans. The thing runs beautifully quiet, as you know, and this is a must for an audio source. iTunes is a perfectly capable player, and infinitely more powerful and elegant than a cd changer.
So what should you do with your $500? ..Depends I guess on whether this source is to be for a portable setup, headphone only, or for a speaker system as well.
At one extreme, for a portable headphone-only setup, I would look for a battery-powered usb dac with headamp all included (total bithead or similar), and spend the rest on in internal/external hard disk size upgrade.
At the other, if it were to be a home system, I would spend the bulk on that getting the best DAC you can, which probably means going second hand. You can either go separates or integrated. The separate route will be more difficult to squeeze into $500. It could be something like an ack dack or a scott nixon (these 2 are non-oversampling so redbook only though - no dvd!). You would then have to get a usb-spdif or usb-toslink adapter (these can be had quite cheap), and a headamp (assuming you dont want to or can't run straight from line-out to headphone)
Or you could find an integrated one with a headamp included like a m-audio audiophile usb or similar. (ie trading final quality for integration and cost).