You can modify your exhaust and be just fine with SMOG. Some 7.3s came with a catalytic converter. If yous does you will need to keep it. Other wise you may do what ever you want to it (SMOG wise..).

However, if your exhaust is too loud (hard to do on a truck with a turbo) or if you dont have a muffler, you can get a ticket. But that will not fail you on a SMOG. All SMOG does is check for emissions standards, and as of right now (just tested earlier this year) very little testing is being done. They check for check engine lights, excessive smoke on acceleration, and "obvious modifications to the emissions systems." So with an exhaust system you're safe.