So I was performing routine maintenance and noticed a shredded bit of plastic where the rear axle driveshaft attaches to the transfer case.
My initial reaction was holy crap something is wrong. After looking at it I "think" it is just to cover the area where the drive shaft moves in and out of the transfer case as you drive. But still it is a concern and wondered if anyone has any insight as to should I be concerned about this.
Thanks Clyde

 

Mine has been like that for a "very" long time. No fluid leaking out nor any ill effects.
Someday I may change mine,...

 

That is the dust lip, which is part of that output seal. I think I'd be tempted to pop a new seal in there before one of those pieces gets caught in the seal lip and you end up with a leak. Also, it pays to keep the sealing surface of the slip yoke protected from the elements, or you'll have problems keeping it from leaking in the future.

 

So, based on responses I am going to put "replace the seal" on my list of things to do soon.
Thanks again,
Clyde