The stock set up only has about 4 inches of travel. You lowered the forks 2 inches. This reduced the travel to two inches. That's part of the issue.
When lowering the forks, does Hugh recommend cutting the springs? I might try putting the cut off parts of the springs back in. Put a washer between the two pieces of spring.
A lot of people that lower the forks use a heavier oil in the forks. This will slow the compression, possibly enough the minimize bottoming out.
Leo
First of all, at least the later (76 or 77 onwards) 35 mm XS 650 forks actually have 150 mm/ 6" of travel, not 4". Most modern sports bikes have around 120-125 mm or 5" fork travel. One can only assume the manufacturers arrived at that number by extensive testing. So lowering an XS fork 1" may be a clear improvement if done corrrectly, although reducing travel 2" may be less than optimal.
Secondly, spring rate and spring preload are two different things. Cutting a spring actually INCREASES spring rate, or in layman's terms: "Makes it stiffer"
So the cut stock spring already is a stiffer spring than it originally was.
I would suggest increasing the spring preload by making a longer preload spacer. Maybe 1" longer than the stock spacer to begin with.
And finally, the fork oil level will also influence how "stiff" the fork feels. Try increasing the oil level maybe 20 mm. A thicker fork oil will also increase both compression and rebound damping, again making the fork feel "stiffer"
For anyone interested in motorcycle suspension, I strongly recommend Racetech's book on the subject. Wilbers in Germany also have a great book, but that one is written in German, not English. And Tony Foale has written a great book, "Motorcycle Chassis Design". All these books are great reading for the technically minded, but the Racetech one would be my number 1 recommendation.