In Mac OS X 10.5, the X windows server is started automatically on demand by launchd.
This is pretty cool, but there are a couple of issues.
1. If you used to start X11.app from the dock, you'll probably want to no longer do that (as you end up with two icons in the dock, one which seems to bounce forever).
2. On demand launching doesn't work for remote X sessions (so you have to run a local 'xterm' or something to get X11 started before you try to have your remote X windows applications connect to the local X windows server).
3. If you have the DISPLAY environment variable set in your login scripts (.cshrc or ~/.MacOSX/environment.plist for example) you'll want to remove it, as it messes everything up.
Where do you set $DISPLAY then?
You don't. It gets set automagically by launchd when it starts up the X server.