Brake pad wear usually will not effect the feel of the handle. The brake fluid in the system replaces the missing linings in the caliper as they move outward. It sounds as if you have air in the system or a defective master cylinder. In 03 they used dot 5 which was a problem back then due to the fact that it compresses more than the other dot fluids. That's one reason why they stopped using it in the ABS bikes. If you have bled the brakes and possibly replaced the brake fluid through bleeding the system repeatedly, I would remove the brake caliper and position it so the bleeder is exactly at the 12 o'clock position and upright, put a shim between the pads about the thickness of the rotor and bleed the caliper then. Quite often there is air trapped that normal bleeding just will not remove from the caliper. Also DO NOT mix the brake fluids. If you are running the DOT 5, stay with that then, they do not mix.