Brake handles hit the bars...

It could be line flex causing the problem. Are you using DOT 4 or 3? These are the only 2 I could think of right off hand. Something is giving.......

Have one of these yet?
http://www.mityvac.com/kits.html#brakebleedingkit

Sure makes bleeding all the air out a piece if cake!

1tontj said:

But after lots of use the handles are getting more and more soft. They used to only move a little bit and work great, now you have to pull them far and they work only ok.

Click to expand...

If it were a leak somewhere in the system, I would think it would be fairly easy to spot... I have little experience with motorcycles (just got into it recently) but I have hydraulic discs on my mountain bike, and a fluid leak would always be a simple thing to find. Particularly on something that goes in a dusty environment :)
Check your reservoir level, that will be an indicator if you're losing fluid somewhere you can't see...

Heat buildup has an effect on fluid and braking effectiveness as well...

Also, I would think this is something I used to do all the time on my mountain bike that would translate over 100% to a dirtbike:

If you don't break in new pads correctly from the start (mating them to the rotors), you suffer from much reduced braking effectiveness after they have high spots that have glazed from excessive heat buildup...

With the pads you have chosen I would think this is less of a concern, but still might be a contributing source. If the brake pad effectiveness was "reduced" from when the pads were brand new, then this would give the illusion of the levers travelling farther down as you would be having to use more force (travel) then you previously had to before the brakes starting falling off in performance..

Just a stab in the dark from me...

Feanor

Lots going on here 1ton. Did you get this from Garry at EFM? Is it a braided single piece steel cable or one that bolts up to the existing rear brake line? If the latter, ask Garry to order you a single piece steel braided cable. Also, try using speedbleed http://www.speedbleeder.com
That makes the bleed job very simple. I have them on my dirt and street bikes and ready to convert my cars.
If the fluid is not changing and there are no leaks then the brake line is balloning out and in with hydraulic pressure applied and released. It shouldn't do that as all the hydraulic action is going into stretching out the brake line and not pushing the brakes out.
Keep in touch on this as I am waiting for my hand operated rear brake from Garry.....as soon as he gets in the new steel braid cables.

Re-reading your initial post, it sounds like the brake mush is with both front AND rear? How's the color of the fluid in the master cylinder? I ask because if there isn't an external leak with fluid missing and your using a braided steel cable, then I would suspect that the master cylinder it'self has a bad seal and the fluid is leaking past itself and back into the master cylinder. When this happens, the fluid gets dark as the rubber is wearing. The more it wears, the darker the fluid and the mushier the brakes.
You've tried adjusting the free play in the lever itself, right? As my pads wear, I find that I have to adjust the little set screw on the lever perch. I'll really be interested in what the outcome is on this. Thanks!

I can see where this would be an issue with the rear brake and the hand lever. It is not made for this application. It is such a long run that you would quickly run into a situation like yours. Even line flex could cause the lever to move more than if it were hooked up to the foot lever causing excessive travel. Of course air in the lines also contributes to the effect. Let us know how it goes. I think a higher capacity master cylinder would help tons.....