Hi, I'm glad to hear that you got Busybox up and running alright.
In regards to the whole getty situation... it sounds like the getty supplied in Busybox is the "real deal" in that it may be attempting to read a passwd file in order to authenticate users. Unfortunately, we've never ported or tested the passwd suite under Linux for Nios or Nios II.
My recommendation at this point would be to
(1) Build a new filesystem project with agetty support in it.
(2) copy over the agetty.exe file from the new filesystem project over to your project containing busybox.
(3) modify the inittab in the filesystem project with busybox to launch agetty instead of getty.
I haven't had a chance to try it but I've got a fair amount of confidence in it succeeding.
As for your second question...
I'm not sure why mount is giving you grief regarding permissions. Can you give me the following info?
(1) are you using busybox mount?
(2) what are the permissions for /dev/mtdblock1 and the permissions for /usr/apps?