Well, using switches 2 and 3 in the 'on' position will anable VGA and Component, as VGA on the original XBOX is just modified Component signals, which is why you can ONLY use VGA with a VGA patched BIOS.
So, you can easily mount connectors for both options and permanently enable switches 2 and 3, and both Component and VGA would both work, you would just have to use different BIOSes for both modes.
And as far as the LM1881N diagram goes, yes, feel free to use it if you like. In fact, I recommend it. It will do no harm to Sync-On-Green monitors or TV's. Oh, and yes, 1080i works just fine over VGA, assuming your TV can handle it.
Follow this diagram for LM1881N-based VGA: (note the colors in the VGA connector for wiring)
NOTE: ONLY use switches 2 and 3, DO NOT use all 3, or your VGA will not work. (I don't know why the creator of this diagram put in all 3 switches, it is not correct...)
NOTE 2: Pins 6,7,8 on the VGA connector are grounds, Pins 1,2,3 are the RGB signals, and pins 13,14 are the H/V signals. (note the numbering on the top of the vga connector in the diagram)
NOTE 3: You could simply jumper the pins with wire instead of using switches if you wanted to.
