That was nothing more than a typo.  According to the xauth man page, the
screen number is ignored by xauth.  The man page says that

# xauth generate "${DISPLAY}" .

should generate ${HOME}/.Xauthority and that's not happening for me.

It isn't working for a local server (one where there is no machine
name/IP address before the ":").  XFree 4.2.0 is based on X11R6.6. 
Nothing in the man pages or XFree documents indicate that local
connections to the X server requires special configurations.  I guess
I'll have to dig into the xauth source to unlock this mystery.  Until
then, perhaps configuring the server to run as display localhost:0 will
allow it to work.

> > Subject: XFree 4: xauth says dispaly :0.0 is invalid
> 
> Your Subject: disagrees with your text:
> 
> > a new .Xauthority file because xauth thinks :0. is a "bad" display. 
> > message stating that ":0." is a bad display.  If I use localhost:0. for
> > start-up scripts to use that instead of :0.  According to the X docs,
> > :0. should be a valid display for local X servers.
> 
> Is it :0.0 or :0. that it's getting upset at?  It wouldn't surprise me
> a bit if :0.0 worked and :0 worked but :0. didn't.  (Whether it should
> is another issue.  I run X Consortium X11R6.4 (on display 1 for
> historical reasons) and all three syntaxes work for me - ":1", ":1.",
> and ":1.0".)
> 
> I'd recommend trying giving a screen number, or getting rid of the dot.
> 
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