Quoted: So far we are looking at J&T Distributing and Model One Sales (we're poor college students and we must keep the price below $400).  Any suggestions?  We want 16" barrels and we were looking at M4 uppers but we don't know what the purpose is of the odd step-down between the FSB and the muzzle.   Any help on this issue would be appreciated.   Also, we were considering purchasing flat-top uppers with the intention of eventually adding red dot sights.  However, given budget restrictions at the moment, we would have to wait some time before getting the red dot sights.  In the meantime we would, of course, need iron sights but the flat-top uppers we have seen do not have rear iron sights on them.  Does anyone know of a good manufacturer that produces a flat-top upper with integrated rear iron sights (for under $400)?

The step cut on the barrels is to clear an M203 grenade launcher.
As you can't buy one of these, the cut serves no function unless you just want your rifle to LOOK like a real M4.
Upper receivers are either going to be flattop OR with a carry handle and a rear sight.
The only option for a flattop with an integrated rear sight is the Rock River UTE2.
You are not going to find that upper for $400
The best option is really to get the flattop (all current M4's have flattops) and a removable carry handle or rear sight of some sort.
Of course a cheap red-dot sight will cost you less than a removable carry handle.

Of the two suppliers you mentioned, I strongly recommend you go with J&T.
Model One has a lot more unhappy customers on these boards than J&T.
My first upper about 7-8 years ago was a J&T and I just recently tore it down to re-barrel it.

mr_wilson mentioned Bravo's uppers, but they do not come with bolt carrier groups or charging handles.
These will add $125 to $150 to the price, but Bravo's uppers will be of a much higher quality than the J&T or Model 1 sales.

Because your budget is a concern, start with a 16" CAR setup from J&T.
It will come with a carry handle upper with rear sights.
You are not missing anything by not having the M203 step on the barrel.
When you get more money, you can swap out the upper reciever for a flattop and add a fold-down iron sight and red-dot sight.