In a roughly chronological order, a brief history of Apple's X11.app:
* Original 3rd-party implementation of X11 was a port of XFree86 from Linux; ran on Darwin, replaced Aqua (because it directly interfaced with the graphics hardware using IOKit)
* XonX project created to add official Darwin support to XFree86 codebase; this new, enhanced XDarwin.app still took up the whole screen, but at least you could switch back and forth between X11 and the rest of OS X using a hotkey
* Apple takes XDarwin.app code, forks it, and adds rootless support and better integration with Aqua apps, renames it X11.app and releases it as a "developer beta" for Jaguar.
* Both Apple and XFree86 continue development. XDarwin.app continues to evolve, generally keeping feature parity with X11.app; Apple starts bundling X11.app with Mac OS X Panther as an optional install. Apple pulls in updates from XFree86 for X11.app releases that shipped with Panther and Tiger; XDarwin then incorporates many improvements from Apple's X11.app back into XFree86.
* Many users use X11.app because it is officially supported by Apple and features smoother integration with the rest of OS X; many other users continue to use XDarwin.app because it's built out of the XFree86 source tree, meaning that it is updated along with the widely-used XFree86 codebase. XDarwin.app also contains many interface "tweaks" not present in X11.app.
* Time passes. Bugs are found in X11.app, and the community occasionally responds by fixing them using the X11.app source code available from opensource.apple.com, and then compiling it (for example, the yellow-cursor bug); however, there is no way to directly contribute patches back to X11.app. As a result, some users pass around patched versions of X11.app, but there is no organized way to track (or find) these files.
* XFree86 underwent a licensing crisis and became defunct; more details on Wikipedia at
http://en.wikipedia.org/wiki/XFree86. For a variety of reasons, stewardship of the cross-platform X11 code shifted first to freedesktop.org and later to X.org. Objectively speaking, this series of events "breathed life into" X11 -- more developers were given the ability to directly contribute code to X11, and an initiative was begun to "modularize" the X11 codebase. Put simply, the open-source community overhauled the X11 code in a way that made it easier to update independent components. The best comparison I can make is to fixing a poorly healed bone -- you have to break it again to fix it. It's painful, but the end result is much better. The end result was X11R7.0. (Mac OS X 10.4 shipped with X11R6.6, IIRC.)
At this point, we got some outside help -- I direct you to this blog entry:
http://pogma.com/2007/04/11/modular-xorg-for-mac-os-x/Peter O'Gorman gave Apple a set of patches that made the old XDarwin build in X11R7.0. Torrey Lyons (the original maintainer of XDarwin) contributed a set of patches that brought XDarwin close to Apple's X11.app. The end result is the version of X11.app shipping with OS X 10.5.
The X.org maintainers expressed interest in hosting the X11.app code directly in the main source code repository. That code is available in a branch at freedesktop.org. In the long run, we expect that this will allow for a much smoother development process for X11.app.
Although the "new" X11.app lacks some features found in the old X11.app, and adds some new bugs, I sincerely believe that the new opportunity for community involvement in its development will result in a vastly improved X11.app.