Well in fact there's no such thing as "Unreal 3.5": the guys at Epic keep adding features, fixing stuff, improving their code, etc... And from time to time, when they consider their engine evolved enough compared to the previous major version, they promote it to a new version number.
So basically for Dishonored we're keeping an eye on these changes, grab some, leave others, and also developed a whole bunch of homemade features. But we're definitely somewhere in-between Unreal 3.0 and Unreal 3.5 !
So basically for Dishonored we're keeping an eye on these changes, grab some, leave others, and also developed a whole bunch of homemade features. But we're definitely somewhere in-between Unreal 3.0 and Unreal 3.5 !

I wonder if consoles will cause a major drawback on the visuals, though.
Afaik the UE does not allow major scaling between different versions, unlike - say - the CryEngine.
Or would a DX11 patch work for a game like Dishonored? I guess you can't even tell at this stage of development.

why use UE 3 instead of idtech 4? can you state some pro/cons?