Here's a photo of my setup:
The hose and nozzle hanging down in the picture make up the shower head assembly (it is a hand shower that can hang up on the wall or be removed for directed use). You'll note that the shower is running, but a good portion of the water flow is still leaking through the faucet (with a corresponding loss in pressure at the shower outlet) even though I have the diverter set as forcefully as possible to direct water to the shower head.
I'm assuming that there is some component inside the faucet that needs to be replaced, but I'm not sure which and/or how to go about it. Any suggestions?