The readme is pretty straightforward. Unzip it to the UT2004 directory, or if you're paranoid like me unzip it to a new folder. Then copy the ChaosUT2 folder in the UT2k4 directory.
Copy the contents of the Music folder (in thw new folder you created) into UT2k4/Music directory.
Copy the contents of the System folder (in new folder) into the UT2k4/System.
Then create a shortcut to Ut2k4. Right click on it and chose properties. Next to the command line, or Target, add -mod="ChaosUT2"
Here's what mine looks like:
C:\UT2004\System\UT2004.exe -mod="ChaosUT2"
You can change the icon of the new shortcut to a ChaosUT2 one by right clicking on it, chose properties, then Change Icon, Browse, and select the icon in UT2k4/ChaosUT2/Help