Here's how I fixed them. From my home dir:
# vim .vimrc
Add these lines
filetype plugin on
filetype indent on
syntax on
set bs=2
Just make sure to use vim instead of vi and your arrow keys and backspace should work as expected. Plus, you'll have syntax highlighting!
tips via google search that brought me here: http://www.tjansson.dk/?p=68
** UPDATE **
If you're using iterm in OS X, make sure you have your Terminal Profile Type set to linux. Or you can add the following line to your .vimrc:
set term=linux
