To adjust the heat when cooking with chili, all you have to do is to keep or remove the seeds. Why?
The stem end of the pod has most of the glands that produce the capsaicin. The white flesh, that surrounds the seeds, contains the highest concentrations of capsaicin. Removing the seeds and inner membranes is thus effective at reducing the heat of a pod.
from the Wikipedia entry on Chili pepper
In simple terms, the heat in chili is from the oils. Turn down the heat by taking out the source: the seeds.
If you want your food fiery hot, keep the seeds and the whitish membrane inside. If you want your food to have that chili warmth without having people consuming all of the world’s water supplies, scrape them out.
You must be careful when scraping them out, though. Capsaicin can be very nasty, especially if it comes in contact with your eyes. Ouch, It burns!
*sigh* I miss the Chili Con Carne from Julio’s in Bicol. Was it in Legazpi City, Albay or what? It was a relatively small restaurant but the food was really good! Well, it doesn’t really matter now though since they’re now closed. :(