This is standard for 35 spline stubs with warn hubs. Most places never tell you about it though.
The stub is the same length as the 30 spline but the smaller shaft sticks in the "cup" of the dial where the 35 spline stub is big enough to hit the edge of the cup.
Solution is grind the tip down roughly 1/8-3/16" and you should be fine. You may lose the snapring groove and may want to re-cut it on what's left sticking out.
Driveslugs are fine on the street as long as your driveshaft runs smooth at high speeds (tough to do with a ujointed shaft but typically easy with a CV) and you don't mind the extra drag and wear of running that shaft, the diff, axles, etc all the time. You kind of step back to the old 203/quadratrac days but it can work.