OCSupertones - In a freshwater setup, _any_ filter will produce nitrates (except nitrate eliminating filters). Producing nitrates is a sign that the filter (be it a HOB, canister, UGF, RUGF, etc. etc.) is working as a biological filter. Thats why most of us do water changes... to reduce the amount of nitrates present in the water due to the nitrogen cycle. If my filters weren't producing nitrates, I would be worried. I believe its different in SW setups, as a deep sand bed and live rock convert nitrates to nitrogen gas. I'm not too familiar with that, so I'll leave it to a SW person to explain.
As for using a UGF as filtration, I really see no problems with one. They have been used for who knows how long in the world of aquaria. They work great as biological filtration, and if large enough powerheads are used, they are also very good mechanical filters. The only problem with these types of filters is that quite a few users do not maintain them properly (through good gravel vacs). Without proper maintainence, gunk eventually builds up under the gravel plates, slows down the UGF, and eventually renders it useless. A solution to this is to use a RUGF (reverse under gravel filter). Certain powerheads have the ability to go into reverse flow. Instead of pulling water from the top of the gravel down, water is pushed from the bottom up. By putting a sponge over the intake of the powerhead, you essentially prevent any gunk from collecting under the plates.
However, as pinballqueen has said, UGFs (or RUGFs) will not work in some cases. Cichlids being one of them. If a hole is to be dug in the substrate, that would also render the filter nearly useless.
That said, I'm not a fan of UGFs. I have nothing against them, but I feel that there are several better methods of filtration out there, that can contain more surface area than a gravel bed.
If you have a working UGF on your tank and maintain it properly, all the more power for you. Overfiltration is always better than underfiltration =)
Check this
link out for more info on those types of filters.
HTH
-Richer