I appreciate the feedback thus far...
I completely agree on getting more fit as a starting point. It's silly for me to worry about the difference a few pounds on a bike frame makes when I'm carrying around 70lbs. of blubber (I'm rolling with around 30% body fat). I'm working on that part both on the bike and the gym. In this respect - the bike represents cardio I don't hate (and even find myself enjoying my rides - they aren't just a way to shed pounds).
As far as the bike itself goes - there are a few factors I'm considering in making a purchase of a new bike.
1. I have a teenage daughter who needs more Dad/Daughter time. I have two choices. Buy her a bike (I probably couldn't justify the cost of a nice(r) bike for her yet as I don't know her full interest level yet so I would be buying another department store bike). Or I can buy myself an upgrade as a reward for losing some weight and sticking to the ride.
2. Current bike seems to have some issues. Changing gears is pretty awful. I use my bike almost in a single gear for 90% of my ride because switching them is usually a pain. Reading above, that probably contributes to the knee pain as some of my uphill adventures have been in the same gear I would ride flat surfaces in. That all being said, if I decide to keep riding this bike or decide my daughter could use it - I will need to invest in a tune up by a reputable bike shop. So that probably doesn't factor too much into the decision.
3. Sales! The bike shop in town I linked has a promotion called "TrekFest" which offers some yearly savings.
I figure if I'm going to buy a bike, why not do so now and take advantages of a promotion.
A few bikes the retailer suggested:
trek 8.2 ds (449.99 discounted from 550)
trek 8.3 ds (609.99 discounted from 660)
trek 7.2 fx (439.99 discounted from 490)
trek 7.3 fx (609.99 discounted from 660)
The sales guy mentioned perks going from 8.2 ds to 8.3 (better handlebars, locking mechanism on the suspension which supposedly helps with speed).
He said the 7.3 offered a better drivetrain compared to any of the other models (including the 8.3ds).
Do any of these upgrades justify the $150-$160 cost difference. At the end of the day the cost difference between these models was more than I paid for my original bike to begin with, so it's not insignificant as far as cost goes, so I just want to be smart with my $$.