It sounds like you have successfully done what frustrates me the most after a kernel recompile. Is that what you did was recompiled your kernel?
Please, please, I beg you to tell me what you did from dri.sourceforge.net; I find the web page confusing. I also have a Radeon 7500.
From dri.sf.net, you clicked the Download link, which gives you either source or binary choice. You picked a binary snapshot from the list, say, radeon-20031120-linux.i386.tar.bz2 and ran install.sh...
I think this is as far as I got, because I vaguely remember getting an error like that.
So you just did a removepkg on XFree86, and then installpkg of XFree86 from the CD, and it worked?