New pads (You said they're rock hard, and while filing them down helps a bit, the rubber is toast.)
New levers. (if your levers are visibly bending when you squeeze them, your brakes won't work right.)
New quality cables and housings. Cable housing is crucial to the way brakes work. Cheap housing compresses when you squeeze the lever. Even if you changed to V-brakes, which I wouldn't bother with on this bike, you'll need new levers anyway, because the cable pull is different. Good V-brakes aren't cheap, and cheap ones aren't good.
Those brakes are never going to be great, being low-end stamped steel short-arm cantilevers, but they can be good enough to stop the bike if they're set up right. There are ISO testing standards for bicycle brakes, and every brake Shimano sells passes them.
--Shannon