Hi,
Good question. Unfortunately the answer to the question 'How much memory should an application pool use ?' is 'As much memory as it needs'
By way of example, today I was looking at an IIS application pool on a 64-bit Windows 2003 server running SQL 2005 Reporting Services and it was using 4.3GB (yes that is Gigabytes) of memory.
So, clearly, if I had imposed an arbitrary limit of, say 2GB, for my application pools then this application would have hit that limit and recycled itself.
If your application really does require 500MB of memory then imposing a lower limit is clearly going to cause you some problems.
One possible approach to this problem might be to remove all memory limts on your application pools and schedule nightly recycles where possible. You might also want to consider moving to a 64-bit platform if you find that you are reaching the limits of 32-bit Windows.
Regards,