Well, 1st April already passed, so this is really bad... :\
But why the hell they want you to cancel it? I mean, it's basically a mod like any others, for UT (they are still profiting from this 10 year old game, so you would give them more money instead of damage them), where it is allowed to do whatever you want as long you keep the engine itself intact and the mods/addons free for everybody and as long people need UT to run it (and this last one was a worry that you had, as in moddb people asked you to make it standalone, and although you could, you simple said that you wouldn't for those same reasons).
So WHAT THE HELL IS WRONG WITH EPIC? You're just too damn good for them, is that it? If they were smart like google, they would try to hire you instead. Or perhaps they want just you to take off some native UT3 like features from the SDK...
Anyway, good luck, and I must say I was never so disapointed with Epic, that's a very low attitude from them.