Your chamber is not too big. I always manufacture chambers with room for growth. And as long as the measurements you provided us were accurate your chamber is not the issue. Trouble shooting the problem you're having has a two-fold answer.
#1 - Your sleeve may be too tight, to test to see if that's the issue, wear a two inch portion of your sleeve at the base of your penis for an hour without the chamber. If your penis gets cold, then the sleeve is too tight and you can either stretch your sleeve up over a larger object for 24 hours to stretch it bigger, or you can purchase a larger 1" sleeve.
#2 - You could be using too much vacuum pressure. If you're using any more than 10 Hg's then that's too much. In fact with as little weight as you are using you should be able to use a little as 5 Hg's of pressure. Furthermore it's fine that a little bit of the sleeve gets sucked forward into the mouth of the chamber. That's actually a good indicator that your sleeve and penis skin have a good vacuum seal.
The fact that you took two months off doesn't help with the issues you're experiencing. During the layoff you lost all the tissue conditioning you had achieved. During the conditioning process (which can take several weeks) your penis will start to respond to the traction by expanding during the hang session. Ideally over the course of about 3 months you should start to experience expansion to the point where your penis packs the chamber completely. This doesn't happen in a couple weeks. It's a transitional experience that takes place with consistent, dedicated training.
I believe if you do a sufficient warm up - take a warm or hot shower prior to your hang session, do some moderate jelqs to loosen your flaccid penis and pull some blood into it so that you are at your fullest flaccid state... even slightly erect at about 30-50% this will help your penis circulation. Once you install your chamber you can help the expansion and circulation by priming your chamber 6-8 times. You do this by drawing out 10 - 15 Hg's of pressure, holding it for 5 seconds and releasing the pressure. Repeat this 6-8 times and then on the last prime go up to 10 Hg's and allow your penis some time to expand before you hook up any weight. About 5 minutes should be enough. Then release the pressure, and go up to 5 Hg's of fresh vacuum pressure, disconnect the hose and attach your 3 lbs of weight and do your hang session. Remember to do your 5-10 minutes of aggressive hand stretches / jelqs immediately after your hang session in order to take full advantage of the fatigue you have induced from the hang. Wear a Girth Band at the base of your penis to prevent retraction and keep your flaccid penis full and long.