What's the best ultra compact digital camera for under $500?

Any number of Canon cameras in that price range would be ok.
It just depends on whether you want a great point and shoot and let the camera do most of the work....or if you also want manual controls so you can be a bit more creative with your picture taking if you wish to.
The link below shows you what is available in the Canon range.

The Sony Cybershot DSC-T30 is $499.95 retail, and offers a 7.2 Super HAD CCD Lens. Its has the InfoLithuim Battery which allows for up to 420 shots. Check it out, its a nice digi cam!

DC

any one of Nikon L series

The best one is the Canon PowerShot SD700:

http://www.dcresource.com/reviews/canon/...