With a burgeoning range of lenses to use it was becoming obvious that trying to use them on just one body was awkward, particularly with two people wanting to use them. Also the 50D was a little big and bulky for some events.
At the time the 500D was the latest xxxD style body. Being able to take all of our current lenses in a smaller, lighter package was good, and the inclusion of HD video was icing on the cake (we've barely used it since but it's nice to know it's there).
Sporting the same size 15.1Mpixel sensor as the 50D the 500D had improved the noise a little. How I wish the 50D had had the 500D's sensor! Hence in the right conditions the 500D can produce better images. The problem is the conditions the 500D doesn't fare well with.
While losing some of the weight and bulk of the (semi-)pro bodies it also loses the rear control dial and joystick. When dealing with scenes and subjects that can change or move rapidly, being able to rapidly change camera settings and focus points is almost essential and the 500D controls don't easily allow that. I find that where on a 50D or 1D I can make most adjustments without taking my eye from the viewfinder, on the 500D most operations require pulling back, looking at the rear screen and navigating around to the setting you want.
The slow burst speed of 3fps, small buffer and slow SD cards, along with a smaller viewfinder also limit the camera's use for high speed action. It's very easy to fill the buffer with a burst and then have to wait for it to clear, something we very rarely hit with the 50D.
Really, though, these are criticisms of the xxxD or 'Rebel' line as a whole, and are mostly a result of their smaller size and lower price. If the 500D had all the features of a 50D it would just be a 50D!
Where the 500D proves it real use is when you want DSLR capability but don't want all the bulk and weight. Stick an EF-S zoom or fast prime on, maybe a 270EX flash, and the setup can fit in a sensible sized camera bag and be carried around all day. It draws less attention in use as well. Also nice to take along for landscapes on long hikes or mountain climbs. Landscapes don't need high speed focusing, action tracking or high frames per second. Slap a good lens on the front (10-22mm being a favourite) and take your time composing on the rear screen in Live View mode.
As I'm mostly using pro-sized bodies with big lenses it can feel a bit funny handling a 500D by my fingertips but I must remember it was bought to be small and portable so can hardly be blamed for being what it is. In the right conditions it can take very good shots in a discrete and economical package. As a small backup body we have no plans to upgrade any time soon. The 550D or 600D pack slightly nicer sensors but nothing that would really justify the cost of upgrading.