Meanstryk sends along the reply Epic's Mark Rein made to a post he made to GT's Unreal messageboard to a thread called What's really new in UT, where he asked what is fundamentally different between the Unreal Tournament engine and Unreal. Here is Mark's reply:

I'm glad you asked!

We've downplayed the technical improvements in the engine because what we're really pushing with UT is gloriously frenetic gameplay and all the great content, AI, weapons and game types. But here are a few (the ones I can remember off the top of my head) of the feature improvements we've made in turning the Unreal Engine into the Unreal Tournament Engine:

1. Skins are 4x more detailed.
2. New completely integrated Graphical User Interface.
3. Full Unicode support throughout means the engine can handle double-byte fonts like Japanese and Hebrew. We hope to ship the Japanese version of UT simultaneously with the French, English, Spanish, German and Italian versions.
4. Linux is now supported from the exact same codebase as Windows 95/98/NT.
5. Greatly improved netcode.
6. UnrealScript language improvements.
7. Decals.
8. Vastly improved D3D support (further OpenGL improvements are also planned).
9. New installer that helps optimize your setup and install mods.
10. New MOD format for packaged mods.
11. Better memory usage.
12. Sound code improvements (A3D 2.0 and latest EAX version support)
13. Server browser
14. Variable level of detail support for meshes
15. Support for S3TC and DXTC texture compression
16. TrueType font support

...and more that I'm sure I'm forgetting to include. Some of these, and other improvements, were delivered throughout UT development in patches for Unreal.

In addition all Unreal Engine licenses will be freely entitled to use the Unreal Tournament Engine once UT ships.

Erik DeNeve, who programmed the fire engine and CPU optimizations on Unreal1, arrives TODAY in Raleigh, NC from Holland on a 3-year work VISA. For most of the past year he has been working on an incredibly powerful new animation system that will be integrated into to the Unreal Tournament Engine after UT goes final in a few weeks. In addition we're planning on a new particle system, some AI infrastructure improvements and hardware transform & lighting support. These things won't ship in the box (too close to finished to add major new features) with Unreal Tournament but are geared toward other projects we'll be working on after UT ships, including Unreal2. Tim has also been rewriting the editor in his spare time and that, along with an exciting new next-generation renderer, will take priority once UT ships.