Not so; this was most likely a smart move by Twitter for two reasons.
First, the $500 million was not actually $500 million dollars; it was $500 million of Facebook stock. The offer was based on the pre-credit crunch valuation of Facebook, and "in these troubled times", such an offer is just not appealing enough to get Twitter to acquiesce to a Facebook take-over.
Second, the ceiling on Twitter is nearly limitless. The shear number of users continues to sky-rocket, and the notoriety of newer users (Britney Spears tweets) continues to spur more people to sign-up. If, and when, Twitter develops a business model (which will likely be sooner than later), their earning potential will be enormous. $500 million may be laughable compared to what twitter may be worth a year, or even 6 months, from now.
But wait, wouldn't it be only provident for Twitter to integrate with Facebook? Not necessarily. Facebook's focus is primarily for social networking, while Twitter is seeking to provide a professional/business service. Keeping the two networking systems and services separate and distinct might prove to be a successful strategy for both parties (read as: don't mix work and play).
Bottom-line: Twitter made the right decision. And, Facebook will still be as popular as ever.