I own a 1979 DS II, the cuddy is "just" long enough as is to squeeze an intimate couple inside for pup-tent style cruising (without the threat of the tent collapsing!) and doing so will bring new meaning to the phrase "crawling into bed". In order to make room for a porta-pottie you will need to increase the headroom (no pun intended!), by raising the height of the cuddy. My recommendation is that if you want a cabin boat, the DS II is not what you want, by the time you have rebuilt the boat to what you want, you will have spent far more than the cost of a boat originally built with a cabin. (and I'm the type of dreamer that has considered doing just what you propose to do, but not on my DS II, I've thought of rebuilding an O'DAY 192 or similar boat, to have just 2-berths and a galley instead of the stock 4-berth layout) My advice is to look at such boats as the SIREN, a 17' boat similar to the DS, but with more freeboard and a 100# CB. That boat has a nice cabin with built-in space for a porta-pottie, and will much better suit your needs. Price used should be close to a DS II. If you look at 19' boats then there is the O'DAY MARINER (cockpit is as large or bigger than the DS II, with a 4-berth cabin, hull is the same as a RHODES 19 and so is similar proportions to the DS II), other designs are available too. Getting back to 17' there is the NEWPORT 17, The VENTURE 17 (old MacGregor design, similar to their 21, and in fact looks like they added 4' to the stern of the 17 hul lto create the 21. The Capri/Catalina 16 is good, but the 2.5' wing-keel will make launching/hauling at a ramp harder. Their 18 has even more room without being that much bigger, but again has a 2-2'5 keel. The O'DAY 19 is another centerboarder, has 2 berths and room for a potty. Also has lots of stowage room below. That one is on my dreamboat list. The COMPAC 16 will give you the cabin space and a large cockpit... but is definitely smaller than the DS II and I don't think she will sail as well (I could be verey wrong on that?), The Montgomery 17, Vagabond 17 (AKA HOLDER 17), and the Sanibel 17 (might be 18) are other great boats in this size.
Over all, I've looked at a lot of used sailboat ads and unless you got an incredible deal on the DS II AND she needs a lot of TLC, it is not going to be worth it to modify one for cabin cruising. The DS II that Joe refers to in Small Craft Advisor was modified to allow 1-2 people to sleep out in the cockpit, the owner cut out the seats and extended the cockpit sole out almost to the sides of the hull. He was going to use the cuddy strictly for stowage. The final thought is to Resale Value, any modification to the deck of a DS II will make her no longer "Class Legal", and that could make it harder to sell the boat later, since she will no longer be suitable for racing in the class. Now, not many DS owners race, (I don't and am not even a member of the association anymore) but still.......
I'll include a couple of SIREN pics as reference and one orf a Montgomery 17 (lapstrake hull).