Chris,
Oil droplets being pumped out of the open filler spout is to be expected. Both pistons rise and fall together, so produce a pumping action within the crankcase - this is used to good effect to send oil spray up the pushrod tunnels to lubricate the valve gear. If your new pistons have had very little use, the rings may not yet be fully bedded in - resulting in excess crankcase pressure. With the filler cap replaced and the engine ticking over, the engine should breathe through the breather port in the bottom front of the timing cover. If there is no breathing at the port, then it may be blocked, causing the excess pressure to exit via the generator grommet.
Regarding the 'noisy' engine - postwar Douglas engines are not known for their mechanical quietness, and is probably the reason Mr Douglas decided to reduce the tappet clearance to .003" for the Dragonfly - with the alloy pushrods, it should have had larger clearances than the earlier Mark series engines (I have always run my 'Fly with .006" clearance, and have adopted the theory that 'it is the name on the tank that makes it rattle!!!'). Having said that, if your engine is excessively noisy, it may indicate the onset of problems with the timing gears (Dragonflies do have an appetite for timing gears). If you do have problems with the timing gears, whilst you have the cover off, check that the alternator rotor is not loose - the nut may be tight but the rotor is built on a hexagonal centre and the alloy body of the rotor often works loose on the hexagon. A larger diameter spacer between the rotor and the crankshaft timing gear, along with a large diameter washer behind the retaining nut will trap the actual body rather than just the centre boss. A loose rotor usually manifests itself as a deep rumble from the front of the engine - most noticeable just above tickover.
Hope some of this helps,
Regards,
Eddie.
