When trying to set a background graphic for Terminal, the file selection dialog comes up with three main sections; the left showing specific locations ($HOME, Desktop, File System), the directory tree and a preview pane for the image. The preview pane and location panels open very wide but the directory/file part is very this, displaying only the mime image and one or two letters of the directories or files. If the window is zoomed or maximized the directory/file section widens enough you be usable.
Almost forgot. The version number of Terminal I am using is 0.2.5.4beta2.
Fixed with revision 22888. 2006-08-26 Benedikt Meurer <benny@xfce.org> * configure.in.in, terminal/terminal-preferences-dialog.c: Use the thumbnail preview support for the background image file selection that was added with exo 0.3.1.9. Bug #2069.