I just had to drop out of an audition.
Is it ok to drop out the next day that you found out that one of the reasons is that you didn't feel comfortable doing something that you weren't reg. used to (nothing bad for me)?
The film would have been a maybe paid if it ever made money in its completed state.

It is always ok to drop out of a project if you feel uncomforatable with something in it. Depending upon where you are in the project determines what steps are required.

If you haven't gone into the audition room yet, and decide that it is something you don't want to do, just tell the monitor that you are leaving.

If you have auditioned but they have not yet told you that you got the part, then when they call, just say that you are unable to commit to it.

If you have already accepted the part, then I think it is worthwhile to talk to the producer and discuss why you feel uncomfortable. Maybe something can be changed. If not tell them that you must drop out. Hopefully you will be professional and give them enough time to get a replacement for you.

The audition hasn't happened yet. I emailed the director and telling him this.
Also the audition is way out of the area where I live.

Ok, if you told the director that you will not be auditioning, then it is over. Should not be a problem.

Dropping out before an audition should be no problem at all. I have done it many times due to scheduling conflicts, like if I book a project on the day of the audition.

Now he says that he's willing to edit the part, if I get the part (If I still want to aud).

If he edits it to your standard, then why not?

I agree, if he is willing to work with you, then go ahead and audition. I am sure there will be some give and take during the discussion, but stick to your principles.

I'm thinking of calling him and meet at my local library to aud (they have rooms that you can book).
The aud is way out there (it looks at someone's house).
I can't find his name on the imdb board or googling it. He must be a an up and coming.

Absolutely, this is a tough biz and no one cares about you but you. You should be your top priority. I've walked out of auditions where they spring something on you like (topless). They will respect you in the long run for having standards and beliefs.