That wouldn't be an XFree86 bug.  3D acceleration works in XFree86 fine.
Reassigning to anaconda.

Please indicate what brand/speed/type of CPU you have also, and the
output of "uname -a" please.

Also, how much video ram do you have and what resolution/bit depth did you
select to run at?  Including the full /etc/X11/XF86Config-4 file helps quite a bit

'uname -a' (was included above)
Linux c3po 2.4.18-7.80 #1 Tue Jul 23 18:20:11 EDT 2002 i686 unknown unknown
GNU/Linux

Processor: Intel PIII 750mhz Coppermine
Video Info: ATI All-in-wonder 128 w/16mb display ram

Display settings: 1600x1200/24 bit mode (millions of colors)

Since this is the second limbo beta Ive included /etc/X11/XF86Config (the v4
default). 
------------------

# File generated by anaconda.

Section "ServerLayout"
        Identifier     "Anaconda Configured"
        Screen      0  "Screen0" 0 0
        InputDevice    "Mouse0" "CorePointer"
	InputDevice	"Mouse1" "SendCoreEvents"
        InputDevice    "Keyboard0" "CoreKeyboard"
EndSection

Section "Files"

# The location of the RGB database.  Note, this is the name of the
# file minus the extension (like ".txt" or ".db").  There is normally
# no need to change the default.

    RgbPath	"/usr/X11R6/lib/X11/rgb"

# Multiple FontPath entries are allowed (they are concatenated together)
# By default, Red Hat 6.0 and later now use a font server independent of
# the X server to render fonts.

    FontPath   "unix/:7100"

EndSection

Section "Module"
        Load  "dbe"
        Load  "extmod"
	Load  "fbdevhw"
	Load  "dri"
        Load  "glx"
        Load  "record"
        Load  "freetype"
        Load  "type1"
EndSection

Section "InputDevice"
        Identifier  "Keyboard0"
        Driver      "keyboard"

#	Option	"AutoRepeat"	"500 5"

# when using XQUEUE, comment out the above line, and uncomment the
# following line
#	Option	"Protocol"	"Xqueue"

# Specify which keyboard LEDs can be user-controlled (eg, with xset(1))
#	Option	"Xleds"		"1 2 3"

# To disable the XKEYBOARD extension, uncomment XkbDisable.
#	Option	"XkbDisable"

# To customise the XKB settings to suit your keyboard, modify the
# lines below (which are the defaults).  For example, for a non-U.S.
# keyboard, you will probably want to use:
#	Option	"XkbModel"	"pc102"
# If you have a US Microsoft Natural keyboard, you can use:
#	Option	"XkbModel"	"microsoft"
#
# Then to change the language, change the Layout setting.
# For example, a german layout can be obtained with:
#	Option	"XkbLayout"	"de"
# or:
#	Option	"XkbLayout"	"de"
#	Option	"XkbVariant"	"nodeadkeys"
#
# If you'd like to switch the positions of your capslock and
# control keys, use:
#	Option	"XkbOptions"	"ctrl:nocaps"
	Option	"XkbRules"	"xfree86"
	Option	"XkbModel"	"pc105"
	Option	"XkbLayout"	"us"
	#Option	"XkbVariant"	""
	#Option	"XkbOptions"	""
EndSection

Section "InputDevice"
        Identifier  "Mouse0"
        Driver      "mouse"
        Option      "Protocol" "IMPS/2"
        Option      "Device" "/dev/psaux"
        Option      "ZAxisMapping" "4 5"
        Option      "Emulate3Buttons" "no"
EndSection


Section "InputDevice"
	Identifier	"Mouse1"
	Driver		"mouse"
	Option		"Device"		"/dev/input/mice"
	Option		"Protocol"		"IMPS/2"
	Option		"Emulate3Buttons"	"no"
	Option		"ZAxisMapping"		"4 5"
EndSection


Section "Monitor"
        Identifier   "Monitor0"
        VendorName   "Monitor Vendor"
        ModelName    "Monitor Model"
        HorizSync   30-95
        VertRefresh 50-150
        Option "dpms"

	
EndSection

Section "Device"
	# no known options
	Identifier   "ATI Rage 128"
        Driver       "r128"
        VendorName   "ATI Rage 128"
        BoardName     "ATI Rage 128"
        
        #BusID
EndSection

Section "Screen"
	Identifier   "Screen0"
        Device       "ATI Rage 128"
        Monitor      "Monitor0"
	DefaultDepth	24

	Subsection "Display"
        	Depth       24
                Modes       "1600x1200" "1600x1200" 
	EndSubsection

EndSection

Section "DRI"
	Mode 0666
EndSection
---------------------------------------

Could you include your /var/log/XFree86.0.log file?

Rage 128 3D acceleration only works in 16bit depth IIRC.
The log file will indicate this.

My initial assumption (and reason for reassigning...) was I thought
anaconda chose an i386 kernel (which has no DRI support).  Probably
wrong on that now...

>configures 2d just fine, but glxinfo still reports Mesa GLX Indirect. It also
>does not install the kernel r128 module either.

Aha, my assumption was right.  ;o)

Anaconda should never install an i386 kernel.  ;O)

Changing the bit depth to 16bit activated the 3d extensions. (thanks guys)
If the 3d extension is related to ram on card and bit depth-
Should there be a dialog window or notice on the Xconfig portion of anaconda
stating such?

ex: 'Due to the amount of ram on your video card, the bit depth you selected
will not enable 3d hardware extensions. Please select a lower bit depth, if you
want to enable this feature.'

There's another bug report (don't remember the # offhand, it's deferred for now)
about making the xconfig process make you more aware of implications for DRI.