UE 1.0 had nothing to do with UE 2.0 and 2.5
Epic megagames made UE 1.0 and atari made UE 2.0 and 2.5
and yes 2.5 is just an updated version of 2.0. hence the ".5". If it was a whole new engine it would be called UE 3.0. sorta like how they made an entirely new engine for unreal and called it UE 3.0
go figure
You are wrong.
Epic Games is the maker of the Unreal Engine. Atari has nothing to do with the engine making. And to this day you can find code from UE 1 in UE 3
Doesn't mean it is the same engine anymore however. Alot of engines are built in this fashion. Many of today's most popular games use engines built off tech from older engines. Source is exanded off Gold Source (half life 1 tech), which is a compilation of Quake (now Id) tech 1 and 2. Call of duty engine started off as Id Tech (quake) 3.
For Unreal Engine it works like this.
Unreal Engine 1 (first engine)
Unreal Engine 2 (Significant upgrades to almost every part of the engine, thus new engine number)
Unreal Engine 2.5 (Significant upgrades to a few systems but rendering and most of the rest stay the same)
Unreal Engine 2.X (A version of UE 2.5 with a few more advanced graphical features for use with the Xbox)
Unreal Engine 3 (Significant upgrades to almost every part of the engine, thus new engine number).
Unreal Engine 3.x (so called by others, to Epic it is still just Unreal Engine 3. Significant upgrades to some systems such as lighting as well as great new tools for creation. They plan to keep upgrading it and the latest build can now almost always be found in the freely available UDK).
Known Third Party engine based off UE
Vengeance Engine - First used in Tribes Vengance (and then Swat 4 and I think a few other games), it was based of UE 2.5 code with significant upgrades to the rendering and other systems.
Vengeance Engine 2 - The hybrid of the original Vengeance Engine with UE 3 additions used in Bioshock.
Upgrades can consist of reworking code, or completely replacing it with something new (Ie: adding a new rendering system that works with dual core systems like UE 3's).