500 charge cycles is typical for a properly designed lithium ion battery being discharged at the proper rate. Lithium Ion is pretty resistant to short periods of high discharge, so we probably aren't beating them up too much, like some claim.
Each time the battery discharges, a small amount of the reagent becomes "locked" - that is it can no longer be used in the chemical reaction within the battery. I am not a chemist, so I am not sure what is actually taking place chemically, but I think it has something to do with impurities preventing the free flow of electrons.
Anyway, a "discharge cycle" assumes that you have charged and discharged the battery fully each time. There is a calibrated amount of reagent that becomes "locked" each time this happens, but if you do not fully discharge the battery, the effect is less with each charge. Looking at the total energy output from the battery during the course of its life, a battery which is fully recharged and discharged each cycle will discharge more energy over its lifetime, but a battery discharged only partially before being recharged will last "longer" in the context of typical use.
When a battery becomes "dead" is generally the point at which its internal resistance increases to the point that the charge can no longer supply an adequate current to charge the battery to its full cell voltage. You will notice this when it takes 5 hours to charge a battery that only lasts 2 hours. On some charges, it will just keep pumping current into the battery and the light will never turn green, as the battery just dissipates it all as heat.