It doesn't matter what Linux Distrobution you try, the Radeon will only have sub par drivers. This is because ATI don't let any one know how their GFX Chips work so some one has to try and hack their way through driver creation. If you actually install the ATI Linux drivers they will work much better.
Hardware that the kernel doesn't know about might seem a little confusing but you can't expect the kernel to know and drive every peice hardware in existance. This isn't a realistic expectation of any OS especially linux.
Some quick searching online will reveal many good guides for getting your hardware working. You just need to do some reading and all should be well.
Kernel creating isn't all that dificult. But there isn't any point in doing so unless there is some part of your existing kernel that is conflicting in some way or there is some feature that is switched off, that you need. RedHat Kernels are pretty liberal so you really shouldn't need to make your own with standard desktops.
