Once you have your PSD look like you want to look, You will need to create your custom skins by creating custom skin CSS files and the image sprites related to them. More about css sprites you could find at: CSS Sprites: What They Are, Why They’re Cool, and How To Use Them
You could also take a look at our help section where for each control under Appearance and Styling there is an article for creating custom skin and how to edit the sprites: RadButton Custom Skin
As for the question, how we convert our PSD to sprites, we do it by hand using Adobe Photoshop.
All the best,
the Telerik team
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