Beautiful bike. It's meant to be ridden upright. Trying to do otherwise will cause a lot of the problems you are experiencing.
Raise the seat so that on the lowest part of the downstroke, your leg is almost straight -- not locked out, ram-rod straight but nearly straight. Then move the seat forward a little. Also make sure that your handlebars are adjust to that they are at least 2" higher than the seat.
Lastly, learn to downshift to lower gears and ride with a higher cadence. You're putting far too much stress on your knees by trying to muscle your way through higher gears which only compounds the problems on a maladjusted bike.