I had a look around the net and i am going to assume you are using Vista.
From what little information i find i think it might be saying that a file is unreadable. this could be a damaged DVD or maybe it got corrupted when being unpacked from the DVD to your HDD.
I would suggest downloading CCleaner and removing all temp files etc. Then try to reinstall.
"Error 2350.FDI server error" is a windows based error and isnt necessarily anything to do with UT3.
Worked for me. It's worth a try, if you got the space for it.
Actually, first try to copy the file thats giving the error from the dvd.
If that works, then copy the rest of the files. If not, then you might have a bad dvd-disc.