Not a typical problem. Did you try any other terminal application, just to make sure that it is not caused directly by xterm. The problem really is that you need a terminal to have any error messages displayed - quite a problem if the terminal itself crashes. KDE's konsole was already around in the days of RH 7.3, if I remember correctly.
I suppose you still have the RH 7.3 disks somewhere - reinstalling X completely could be the best solution, otherwise you will have to keep fixing the system constantly.