jmik26, I'll put in my 2 cents worth because the smoke unit you have looks the same as my Vision Challenger's unit, which has been repaired once at Lionel and was never, and isn't, a brilliant performer. Notwithstanding that I agree your best course is to send the engine to them because they must be familiar with this particular unit's issues now:
1. I also voided my warranty by opening the boiler shell. The main stack smoke output was poor and I thought that it was a standard maintenance job to service it by, for example, checking the resistor\wadding contact and priming the unit directly rather than through the stacks.
2. Wrong! As you have seen, the unit has two chambers; on mine there was a single strip of smoke wadding that ran through the bottom slot between the two chambers and up and over the resistors. I guess that the smoke fluid is intended to flow from one chamber to another and up the strips by capillary action. I think that this has now been changed by Lionel by packing ordinary wadding in each chamber up to the resistors. It didn't make any great difference to the output but it works reasonably after the unit has warmed up for a few minutes. The whistle smoke on the Challenger is variable in output for reasons I don't understand. The dynamo smoke mostly works but that has a separate smoke unit. I use Mega-Steam, which works great on my other engines.
3. I suspect that you would get the same sort of repair on the main unit as I did if you returned it to Lionel, that is it was replaced with a new and re-packed unit. Mike Reagan was very helpful in explaining what they were going to do.
4. Lastly, if you want to experiment with a different solution, I don't think that enlarging the slot between the two chambers would necessarily cause smoke to "leak" from one to the other if the slot is filled with smoke wadding. The smoke is produced at the top of the unit where the resistor is and in a re-packed unit will not flow downwards through the wadding. I decided against trying this myself but have obtained a spare main unit for my Challenger.
Good luck. Smoke units are the weak link in all this high-tech. You'll note another thread on this forum where a similar S3 problem is explained:
http://ogaugerr.infopop.cc/eve...7660482/m/8742935127