Problem solved.

When presented a display without a hostname preceding the colon (:), 
xauth uses the host name set in the kernel.  Perhaps because I did not
configure networking before installing NetBSD 1.6, I did not have a
hostname= line in rc.conf, thus had no host name in the kernel, thus an
invalid display for XFree.

> 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.
> > 
> > /~\ The ASCII				der Mouse
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> > 
> 
> 
>