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The now-corrected math issues aside, I haven't found skill challenges to be a failure - quite the opposite - but I do find that the DMG's presentation is sorely lacking and most of its examples are rather poor ones. The skill challenge article series by Mike Mearls in Dragon does a vastly superior job of explaining what you can do with them and how powerful (and flexible) the basic idea can be. I really hope it shows up in some form in the upcoming print books (a DMG would be the most sensible place) because almost all of the problems that people seem to have with skill challenges arise from the DMG's weakness on this point.

The math issue is separate from the rest and isn't really a problem with the concept of the skill challenge as a gameplay element; that said, the actual DCs used in any challenge aren't slaved to the DMG tables so it isn't really an issue. (As an aside, this seems to be one of the big issues people have: The RAW on things like this is a springboard and not intended to be taken as the be-all-end-all, yet a lot of folks seem to be stuck in the mindset that it is and that only what's directly printed can be applied in any given case.)

As for some of the other things...

Degrees of success are in the system. The DMG doesn't talk about it at all (boo), but it's entirely feasible within the RAW and even the (pre-article series) official adventures use it. (H2 and H3 both use skill challenge encounters with degrees of success, for example.)

Badly-designed skill challenges are the big problem, and this is largely the fault of the DMG; its examples are generally awful (they flunk the skill challenge design principles set out in Mearls' columns) and have encouraged more of the same (especially from DMs still getting used to the idea). I suppose they wanted to keep things simple and easy to understand when they wrote the DMG, but it did the skill challenge concept a terrible disservice in the process. Unfortunately, it's difficult to illustrate this without quoting large swaths of the columns in question (which I can't do since they're not the free ones).

This seems to be the problem you're having, Zar - you're reading what's in the DMG and thinking "the book and only what's in the book" when the system isn't designed to work that way at all. Beyond that, the only "RAW" is actually the basic mechanic set (multiple skills, check vs DC, successes/failures) - all of the rest is implementation advice and that's where the DMG is very weak.

Let's give an example of how to design one of them better - still using the basic mechanics but with much better implementation. We'll use the 'negotiation with the Duke' example.

The first thing about this is that the skill challenge should begin long before they actually sit down with the Duke. They arrive in town knowing that they need an audience with him, but arranging an audience isn't likely to be as simple as bumping into him on the street (unless the Duke is known for casual strolls).

As they're heading towards the court/keep/palace/etc they come across a common enough situation. "Stop thief!" A cutpurse has (surprisingly) cut a purse from a merchant and is now pelting down the street with it. The PCs can ignore this if they like, or they can take up the chase. Assuming they do...

Catching up with the thief is most likely to involve the following skills: Athletics (run faster than him), Endurance (run longer than he can), Perception (keep sight of him), Insight (anticipate his movements), Streetwise (having a good sense of your surroundings is important), Stealth (fooling him into thinking he's no longer being followed could be effective), and Bluff (other kinds of trickery could certainly slow him down). Now we loot one of Mearls' implementation ideas: Everyone in the party makes a check against the skill of their choice (and if they can think of a good reason why another skill would work instead, they can use it) against an appropriate DC, most likely Medium. If more PCs pass than fail, they catch up to him and apprehend him (the guards arrive a few moments later and take him into custody). If more PCs fail than pass (or there's a tie) he gets away. Catching him counts as one success towards the skill challenge. If he escapes then it counts as a failure.

Why? Because they've just gained themselves a small bit of reputation, including with the town guard and one prominent local merchant. When the court officials are considering their request for an audience, this will be taken into account.

Several more mini-encounters of this sort take place before, during, and soon after their request for an audience is actually set forth. They might happen to fall into a conversation with the court sage, who is unconcerned about the matter of the army (it's not his responsibility to worry about it) but does appreciate the chance to discuss esoteric matters with educated people (who are all too rare in his opinion): Arcana, Dungeoneering, History, Nature, and Religion are the obvious skills to come up here, but Bluff (pretending to know something you don't) and Insight (getting a sense of what he'd like to hear) also work. Again, everyone makes one check against whatever skill they choose and if more pass than fail, it's another success towards the skill challenge (or a failure if not).

Even filing the request can work this way. In dealing with the officials they might use Bluff (to seem more important than they are or otherwise manipulate him), Diplomacy (for obvious reasons), Insight (realizing that the person they're talking to is on a tight schedule and would prefer to keep it brief, or some similar recognition), and Streetwise (knowing how to work the system (Streetwise is the most suitable for this)). Again, one success or failure can be accrued here via a more-pass-than-fail round. (The audience is still filed for either way, but getting it done right and making a good impression count here, too.)

By the time they actually get around to talking to the Duke, most of the challenge's checks have already been made. For his part, the Duke (who has already heard a lot about the PCs from his advisors) might discuss things for as many as three rounds (as opposed to the one round of the previous encounters) before the final success/failure of the challenge has been determined. In addition to the obvious skills (Bluff, Diplomacy, Insight, Intimidate), and the one quirk suggested in the DMG (History), the Duke is an active man and appreciates the same qualities in others (Athletics and Endurance can be successfully used once each, after the first successful Insight opens up both of these along with History). He's also devout, and an appeal to his religious principles will work (Religion can be used once each round).

Let's say that the target is six successes before three failures. Five 'rounds' occurred before the meeting, so the meeting could last for as few as one or as many as three. We'll play a little loose and say that the Duke will entertain at least one round even if three failures have already been reached. If the group does get six successes before three failures then the Duke puts his support behind the request. If they get three failures first, the Duke might grant more limited support if they've achieved more successes than failures (4 or 5). Otherwise, he's unconvinced. (It's also possible that they run out of rounds with the Duke before hitting 6 successes or 3 failures, particularly if they ignored/bypassed many of the earlier encounters, such as the thief. In this case, it's down to 'did they get more successes than failures' for the Duke's limited support.)


And that's a quick way to illustrate it. The skill challenge ultimately involves many skills over the course of time, and the circumstances change throughout it. Particularly creative ideas might merit modifiers or even (if it's an amazingly good one) an automatic success (or failure if it's an abysmally bad one), and (by other advice) action points can be used to reroll a failed check by an individual PC; utility powers may modify some checks and the right use of a power in a given encounter may even have effects beyond that. Be flexible and let the PCs experiment rather than feeling constrained to checks against the listed skills at each stage.