under the speed section of the options menu it says 'if your computer has a fast internet connection, limewire may act as an "ultrapeer" for slower users. but sometimes when i browse the hosts that i've connected to as "ultrapeers," their speed is listed as modem. what gives?

Many things.

It might be that these people just have forgotten to change their speed setting to broadband.
Then again, it might be that they really do have a modem connection but have set LW to connect as an Ultrapeer when possible anyways. This is of course bad for them as being an Ultrapeer consumes some bandwidth and they probably have none to spare (could be that they read the "Ultra" part of Ultrapeer and thought that being an Ultrapeer would boost their speeds)

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iMac G4 OSX 10.3.9
RAM 256MB
LW 4.10.5 Basic
ADSL anything from 3 to 8Mbps/around 1024kbps

"Raise your can of Beer on high
And seal your fate forever
Our best years have passed us by
The Golden Age Of Leather"
-Blue Öyster Cult-

in addition, there is an advantage for an Ultrapeer to set the declared speed as modem: you avoid searches and uploads to all those users who only want to download from"fast" hosts (trick to avoid newbie floods).

Secondly, the scale of the upload bandwidth throttle changes depending on the speed chosen in the preferences, so if you want to throttle uploads to a small amount, choosing "modem" is a valid choice.

Thirdly, an ultrapeer already is using up about 8 (or more) KB/s just with traffic, and on a 128 bps DSL connection there isn't a lot let over for file transfers. Since the confirmed speed of a host (shows up as black entry in searches) is figured by actual transfers, many slow transfers will show up as "modem" speeds in other's search results.

Bottom line--sometimes those "modem" hosts are working very hard and contributing a great deal to the network