Looks like you need one of those silicone Top Hat looking thingies that slips over the engines exh. and seals the gap?
R/C cars use 'em on most of their pipes.
Edit: Something like the blue gasket in this pic maybe? (coupler? whatever ya wanna call it)
http://www2.towerhobbies.com/cgi-bin...?&I=LXKGJ9&P=0