I don't think they should be flush. As you tighten the exhaust flange bolts, they compress the pipe against a crush gasket that is inside the port opening. If the flange hit the head (i.e. flush with the head), then there would be no further crushing of the crush gasket. Since it is important that this crush gasket be properly squeezed, I would think it is critical that the exhaust flanges NEVER touch the head.
When installing a new exhaust port gasket, tighten the nuts to the specified torque, ride if for a few days, and tighten again to the same specified torque. If these nuts on your bike are the fancy chrome domed nuts, make sure that the nuts are not bottoming out on the stud prior to putting proper pressure on the gasket. If they are bottoming out, put a few stainless steel washers under each domed nut.
Did you use any lubricant on the "plugs" used in the O2 sensor ports? If so and if the wrong kind of lubricant was used, perhaps it is just burning off as the bike heats up. If so, this smoke will go away after a long ride as all of this lubricant burns up.