The swingarm bearings can get pretty bad if they have never been replaced, and can cause a lot of slop in the rear suspension. A buddy of mine had a 2000 KX 125, and it had a clunk in the rear end that was about an inch or so of the travel. The bearings were roasted and missing a lot of the needles. The bike itself was in decent shape, but I guess the bearing had not received any attention since it was new.
Do you hear any noises when you lift the bike up that inch or so? If all you hear is the shock decompressing, I would start with the sag. If you hear a pop or clunk, I might try pulling the bearings just to have a look. If they are in good shape, you can re-grease them and check that off the list.