I would download a newer osso-xterm; see here, or maybe get the Diablo one if you can.

The way of setting foreground color in the stock OS2008 one is... strange. You set the background color from its own button, but you set the foreground color from the fonts dialog.

I believe both the old and the new ones in that link have separated color and font settings.

For .bashrc, obviously, you need bash; what might not have been obvious is that the N800 comes with busybox's ash as a Bourne shell. Bash is available, though, in repository.maemo.org; get it. For the .bashrc, toss it in your home directory, just as you would on a desktop system.