You’ll do just fine with a used iMac, I’m sure.
You can get iTunes directly from Apple for free. I’d go with OpenOffice for an MS Office like suite that’s free. As long as it has a CD-R drive, you should be able to do the CD work just fine.
If you have your own keyboard, monitor, and mouse (from the old PC), you can get a new Mac Mini for only $600, which is a little beyond the price range, but then it’s new and with warranty. You’d want to get a USB modem adapter, though.
OpenOffice is good, but they have introduced a version of open Office for Macs - NeoOffice that works without a hitch. I use it daily with no problems.
If it has no CD burner, just find a large USB flash drive (”thumb drive” or “keychain drive”), the prices on the 4 gb and 8 gb sizes have dropped dramatically in the past few months, and Walmart was selling the new 16 gb for $58 — Buy.com had a 16 gig for under $30 (with shipping, it was about $34 I think). Data CDs are still great for backing up fairly large amounts of data (such as citations, papers, etc, downloaded from the web), but for time saved, portability, and rewriting, the USB flash drive roooools.