I'm not sure how iTunes converts the files, but I am pretty sure that photos with higher resolutions take up more space. Since I don't really have any photos, I don't have any numbers to share. But 500 photos should be less than 1GB for sure, probably even less than 500MB.Could you give some examples?
It depends on the resolution...
500 x picture size = total size
ex: 500 x 1 mb each = 500 mb total size
iTunes scales the pictures down(it refers to it as "optimizing"). Kind of annoying as my pictures were all 6 megapixels and I couldn't zoom very far in on my iTouch before it got pixelated...