I had a very similar problem when fitting my Gen II engine.
Both the muffler and the pedals fouled the engine
I over came it by extending the rear engine mounting studs thus allowing the engine to be mounted higher up the frame.
All seems well with both problems solved in one fell swoop.
Here's a link to my eureka moment: http://outaspaceman.blogspot.com/2011/01/sundry-mortifications-no17-another-year.html
