The first question is: how can I get the C compiler to work properly? When I've tried to compile programs, I get 'cannot create temp'
Try checking to see if there is any disk space left on the root RL device. It may be full -- these were tiny by today's standards -- disk drives. 10 Mb, if I recall correctly.
The other possibility is that the /tmp directory has the wron permission. It should be read/write to all (drwxrwxrwx). If not, try running chmod 0777 /tmp as root, then try compiling again.
Also, how can I get the backspace key to erase? I've done stty erase '^H' but I have to actually type <CTRL>+H to erase.
The other thing I want to ask about is: can I compile SIMH on DOS, so it doesn't display any messages except those of the simulated software, and so it ignores ^E?
You can fix the control E problem by running the command
SET CONSOLE WRU char
... where char is the charcter you wish to use. (WRU stands for "where are you" according to the SIMH documentation http://simh.trailing-edge.com/pdf/simh_doc.pdf).
I'm asking because I want v7 on an ancient laptop I've got lying around - a 486 with 24M of core. v7x86 won't work on it, and I don't really fancy putting Slack 3 back on it - if I'm going to go outdated, I might as well go the whole hog and go really outdated.
Though I might consider 2.11BSD, if that'll work on a machine with 24M of core, and if the escapes will display properly, because
The biggest PDP-11 had 4 Mb of memory, so you certainly won't be limited there. I suspect that if you run nothing else,on the machine you will get fair perfomance on the emulated PDP-11. 2.11 BSD should run.
As far as your other terminal problems, you probably just need an appropriate setting for the TERM environment variable to get vi to work. Usually TERM=vt100 works, but your mileage may vary.
Real men use ed, though! 
I always amaze people by being by being able to use ed. Of course, that's because I'm very old -- old enough to have actually used V6 on a real PDP-11. I think I'll take a nap now.
--
"Jazz music stimulates the minds and uplifts the souls of those who play it was well as of those who listen to immerse themselves in it. As the mind is stimulated and the soul uplifted, this is eventually reflected in the body." -- Horace Silver