Here are my suggestions in order:
1). Spend the $500 on gas to drive you back and forth to the trail, where you can learn from experience 4-wheelers.
2). $500 would go a long way towards a tune-up, fluid changes, new brakes and other maintenance related work to insure your rig is in tip top shape.
3). If you absolutely have to throw parts at it, may I suggest 1.5" ball joint spacers and then relaxing your torsion bars so that after the BJ spacer install there is little to no net lift. Combine this with fresh shocks front and rear, as well as some home made sway bar quick-disconnects for a Cadillac smooth ride on road, with decent flex off road.
4). If you are mechanically inclined you could buy and install an Aussie Locker in the rear differential for under $500. This would be what I consider a hardcore off-road upgrade, as it will lock the rear wheels together under power and severely degrade your on road driving compared to the open differential. Forget about a ratcheting locker if you live in an area that sees snow or ice and you intend to drive in such conditions.
As was mentioned, the 2nd gen is already pretty capable off road, probably a lot more capable than the average driver is. That's why I say spend that money on experience. Parts are cool, but memories of fun trips are cooler!