Very good articles on Telerik and Custom skins. The key to use custom or modified skin is to set EnableEmbeddedSkins property to false. Without this setting Telerik will always use the skin files embedded in the Telerik.Web.UI.dll.
How Skin Works - http://www.telerik.com/help/aspnet-ajax/howskinswork.html
Modifying built-in skins - http://www.telerik.com/help/aspnet-ajax/modifyingexistingskins.html
Creating a custom skin - http://www.telerik.com/help/aspnet-ajax/createcustomskin.html
Register Skin on your page (Register the CSS file in your page) - http://www.telerik.com/help/aspnet-ajax/skinregistration.html.
You can also use ASP.NET 2.x Theme mechanism by coping your custom skin folder in the App_Theme folder. In this case you don't need to manually register the CSS file of your custom skin when you are using ASP.NET themes. The framework will automatically register any CSS files found in the current theme folder (~/App_Themes/MyTheme).