Tom,
I went throught this about two years ago with my Mistral. Basically it's the same configuration down there and the Mistral drawing from Alden show the same original exhaust configuration as the Challenger.
The old exhaust system ( and engine ) had been removed when I got the boat and I couldn't fine the water-jacketed exhaust hose as originally designed for the boat. After looking at a lot of different configurations, I installed a set-up that Rick discribed. I fiberglassed in a pair of supports on the hull several inches above the prop shaft tube. This made it possible for me to screw in an approximately 8" by 10" by 1/2 " fiberglassed plywood shelf to hold the waterlift muffler. I was able to trim off the edges of the bottom flange of the muffler to fit it as far aft as possible so I could get at the shaft packing without removing the muffler. I can do that but it isn't easy. I have a Westerbeke 4-108 and because the engine sits well below the waterline, you need to have a riser in the exhaust to bring the exhaust cooling water into the system above the waterline. Otherwise you risk the chance that water will siphon back into the engine. I assume you know all of this and it is well covered on the installation instructions for the waterlift muffler.
Vetus makes a retangular, flat sided muffler that looks like it would be a much better fit than the round ones. But the plastic on that muffler seems quite flimsy and if you read the paperwork that comes in the box, it will tell you that the plastic should not be subjected to temperatures above something like 155F. If you ran your engine for any time at all without cooling water, you could very well loose the system. Even the heavy fiberglass mufflers like the Vernlift have a limited temperature range but at least they made them out of a temperature tolerant material and they obviously have stood the test of time.
I'll take a picture if I get to the boat and send it.
Good luck.
Bill Merrick
S/V Carmina
Seattle WA