I'm looking at barrels for my first SBR. I know there are chrome lined barrels, but whats the scoop on melonite barrels. My LGS says they are better than chrome. Is that true?

This is the barrel:

http://www.icearms.us/products.cfm?show=865

They can cut it down to 10.5" for me.

Melonite / nitride is not a coating, it's a metallurgical process which transforms the surface of the metal.

In some ways it is "better" than chrome, just depends on the application.  Both are good processes for practical rifle barrels.

Due to the hardness of the surface layer and thickness of that layer, machining operations on melonited parts can be very challenging.  You'd also be losing corrosion resistance and hardness of the metal at one of the most critical parts of the barrel - the crown - if you were to have one cut.  11.5 is a better option than 10.5 IMO.

Ferric Carburization  (Nitride, melonite, Ni-Cor) is superior to chrome lining when referring to barrel treatment.  The Nitriding will not alter any dimensions like chrome will, thus nitrided barrels with be more accurate than Chromed barrels.

Why is a 11.5 better than a 10.5 barrel?

See thread here

http://www.ar15.com/forums/t_2_138/174764__Q__Why_BCM_chose_the_11_5andamp_quot__SBR_over_the_10_5andamp_quot__.html

They are both fine, Noveske uses stainless 416R.
My opinion on chrome is it's great if your shooting corrosive ammo, and to an extent longevity.One thing I can tell you is if the barrel is a 2" moa barrel it will stay a 2" moa barrel, where as a standard barrel will improve over time.That said any quality barrel will do, I run a lot of Noveske barrels, Sabre chrome lined, and other non chrome lined, no issues with any.
Go for quality first regardless.

FWIW, my chrome lined Green Mountain barrel is extremely accurate.  I have a wall plastered with targets that demonstrate 10 rounds of my handloads grouping into less than an inch at 100 yards from a rest .  Chrome is OK if done right, but melonite probably has superior durability.  - CW

http://www.gmriflebarrel.com/militarysurplusriflesbarrels/ar-15--m16--m4--assault-rifle-barrels/m16a2--556mm--20-barrel-with-extension-18-twist

If you want the best of the best, buy a Krieger and send it to H&M metal processing for a nitride treatment....