Here's how you can create/edit your own fonts in X11, to be used in xterm or other applications.

STEP 1
First, you need to generate a bdf (bitmap distribution format) file from an existing font in the X server. (To find out what fonts you already have, run xfontsel.) Run a font server: 

   xfs -port 3000 &
With the font server running, do 
   fstobdf -server "tcp/localhost:3000" -fn "-*-screen-medium-r-normal--*-150-*-*-m-*-iso8859-1" > foo.bdf
to grab the font from the server in the form of a bdf file. Change the 14-part font name to whatever you like.

STEP 2
Edit the bdf file to your heart's content (it's a plain text file.) Be wary of copyrights on existing fonts. For info on the bdf spec, check out 

   http://partners.adobe.com/asn/developer/pdfs/tn/5005.BDF_Spec.pdf
To translate bdf into an easier-to-read format, try using this.

STEP 3
Convert your bdf file to a .pcf (portable compiled format) : 

   bdftopcf -o foo.pcf foo.bdf

STEP 4
Get the X server to load your font : 

   mkdir ~/myfonts             (create a dir to store your fonts)
   cp foo.pcf [...] ~/myfonts  (copy in your fonts; these can be .bdf's, .pcf's or .pcf.Z's)
   mkfontdir ~/myfonts         (generate a .dir file that maps filenames to fontnames)
   xset +fp ~/myfonts          (prepend your dir to X's font path)
   xset fp rehash              (tell the X server to reload everything)

STEP 5
Run xfontsel. Your font is there ! You can now easily have your xterm use the font.

STEP 6
Note, if you need to convert to .pcf.Z, do this : 

   bdftopcf -o foo.pcf foo.bdf
   compress foo.pcf