I'm on the DML as well. I ride with a bunch of the DeVal guys and I use the same screen name.
The smaller pipe inside of the header collector is a silencer. DO NOT cut the divider in the center of the collector, it acts as the 2-1 portion of the pipe and helps the bottom end. If you do cut it out, the tubes aren't optimised to run 4-1 and it will run like crap and be a total bitch to tune (think drag bike). Everything will be on the super-high end and will not be happy in the midrange.
The only difference I can tell from modding the collector was more noise. I changed too many things at the same time to relate differences. Getting silencer out of the collector out was a bitch because there's a weld that joins it in there layered up with some perf'd pipe as well. I didn't have an air chisel so I had to do it the old fashioned way. The inside portion I cut out with my Dremel and smoothed the weld with a drum sanding bit. I figured I just made myself a poor man's header.
Also, since you have your muffler apart, repack it. The F1R from Cobra was notoriously deafening. Doing the collector mod isn't going to help matters any.
To make sure it is indeed your valve stem seals, remove the header from the head. Take a look inside the exhaust ports and look at the stems themselves. If they look like a kid's nose in the winter (all runny and such) they're toast. You can also look down the spark plug holes at the piston top. If it's oil soaked, there's your problem. It isn't unusual for a motor to smoke a bit when it's fired up after awhile especially after doing some work to it. It will be very apparant leaving stoplights though as it was full-on Spyhunter for me since the seals were so shot.
Best of luck.
-Randy