A default install should have the Telerik.Web.UI referenced in the bin folder, not your install folder, and while it may seem tempting to run the upgrade wizard I don't think that's a supported scenario :)
Grab the install version 1109.40 form the _EmptyProject install folder, drop it into your bin. Make sure the project references that, and all other projects also reference that DLL. Don't do that Add Reference thing and find Telerik.Web.UI from the .NET tab...
Or you can get ballsy and use the latest Telerik.Web.UI at your own risk with Assembly binding.
So this is what I have...it'll route any request from an old version over to the "newVersion" you have specified (as long as it exists). Our main site has a ton of custom server controls all compiled against different versions of the Web.UI, but as long as that binding is there, they all just auto-magically co-exist.