Just now I was playing Xevious for the first in a long long time. Never really got into the game, but now I decided to stay with it.
After playing for a while I noticed there are hidden extra lives in the game. They are hidden in the game much in the same way they are in Knightmare. Only now you need to drop a bomb on exactly the right place. Fortunately your bomb's crosshair flashes red whenever it is over a destroyable target (visible or otherwise). So you don't need to drop them constantly.

This way I found 3 already:

Recon mission

Area 1: at the first river that crosses from the left of the screen to the right, with a road seemingly running across it drop a bomb in the water just before the small pyramid
Area 3: When you are flying over the giant lake, on the left drop a bomb where the distance from one bank to the other is the shortest

Scramble mission

Area 1: at a river that crosses from the left of the screen to the right, with two roads seemingly running across it drop a bomb in the water by the left road.

Somewhere in level 6 or 7 I found one too, but then I didn't know what those flags did so I didn't take much notice of the surroundings.

Most mind boggling thing about this is, that these lives aren't there each time. Does somebody know what causes them to be there? Is it random, do you have to do something prior to dropping a bomb on it and getting the flag? Would come in handy since Xevious isn't the easiest game...

Oh and any more locations for lives would be appreciated as well.

Are you talking about things like the hidden flags?
The hidden flags are on the Arcade game.
Their are in the same "line", not exact in the same position every game.
Some of them as you noticed are in rivers or other places with water.

The arcade game also could re-adjust the difficulty setting of the game based upon previous records.

Yeah, I meant the hidden flags.
You say they are on the same "line", not always on the same spot. Will try that. Especially in the scramble mission this will be easily checked since you can get a larger range for your bomb there...

But what do you mean about re-adjusting the difficulty setting? Something like Gradius 2 (less bullets if you have less weapons) or something? Didn't notice anything like that in Xevious. If anything the game gets much easier when playing with the gampmission ship vs. the solvalou craft. Also no determinable increase of enemies or bullets during playing the game.

It was in the original arcade machine. If someone would made a record or a good play (the arcade had saved scores) there would be more enemy ships and bullets in the next play, allowing a even higher score (or difficulty).

The original machine also seems to use three sound chips. The MSX2 game is in English and also use 3 sound chips. The problem is that the 'MSX-AUDIO' "ROM" is missing in most MUSIC-MODULES.

Aleste 2 has a similar feature, if someone watch the demo the game is easier. If someone start right in the game disk the game is more difficult. Ok, there is a optional level select and difficulty setting on Aleste 2.