I'm not an expert on shocks, but the ones that have the rubber concordian covers instead of the prefered dirt "squeegie" (or whatever you call the barrier) don't do well long-term from my experience. The Rock Shox that came on my Garry Fisher Marlin did something like what you're discribing after a year and a half. Once that started, it got worse and eventually locked up completely. I bought a Manitu Axel from Nashbar for only $100 and it's been so much better.
Again, I'm not an expert, but you might want to consider upgrading to something nice.