I could have sworn I'd replied to this. Those guys have covered most of what I'd intended to say.
1 thing I failed to mention is my bronco is lowered like 5"s so alot of the Xtra travel is probably lost because of that reason. When I test drove it last Tuesday it sounded kinda crunchy every time I hit the gas. I think pinion angle is completely correct and my current driveshaft might be pretty close to bottoming out.
Love it! I've known of a few lowered BIIs around the internet, but you are the only one I'm familiar with on the forums. I think that was an awesome build choice for a 2wd BII.
This new info does make things a lot clearer. I'd say that it is definitely likely that you need a shorter driveshaft. Very probable that the driveshaft is bottoming out. I'd also verify that pionion angle. There's a decent margin of error, but it doesn't take much drop to affect it.
I'm in that same boat on my 99 Ranger. It too is lowered and has a transfer case, an actual transfer case because it's AWD, and the double flanged bolt-in style driveshaft with slip joint in the middle. Right now the back end is just dropped 2" with the stock lift blocks removed, and I'm pretty certain that the slip joint bottoms out at times like what you described.
I temporarily had it lowered a fair bit more in the rear when I was figuring out exhaust routing. I don't know theexact number, but the axle was flipped raised back up slightly with shackles and I don;t remember if it was ranger or Explorer springs. Anyway it was much closer to your 5" drop than what it is now, in order to install the driveshaft I had to offset the axle flip brackets to move the axle back about an inch. Driveshaft was bottomed out and still too long, also the pinion angle was terrible. I still drove it home from a few miles the exhaust shop, but it was definitely bottoming out both the driveshaft and the bumpstops. When I got home I promptly flipped back to spring over and am basically a stock2wd in the rear for now.
Right now I'm in a holding pattern on getting a new driveshaft made because I'm not sure what is going to happen with suspension. Hopefully someday in the near future I'll be able to get the control arms I need to correct front camber and drop the front down a little more. If that happens I can go back down in the rear, not quite flipped axle lower but more than this, and will be ready for that driveshaft. If that doesn't work it's probably going back up to 4wd height and where the stock shaft works fine, or maybe even lifted a little to need a longer shaft (probably not).