Wow... I have quite a lot to say about this subject. Hence why I started a blog about it, so I won't go on and on here.
I've lost 50 pounds, and have 73 more to go before I get to my goal weight. Yes, I was really big to begin with. Now I'm a more normal size, but still not what I need to be. I've found that once I get to my goal I'll actually need plastic surgery to remove loose skin, so it's pretty severe.
First off- you're right about avoiding expensive diet foods. Do not, do not, DO NOT buy them! And not just because they're unfrugal... if you look at the nutrition facts, most of them aren't really great for you. Next time you're in the grocery store, pick up a Weight Watchers or Lean Cuisine meal and look at the sodium content. An average adult woman should be eating fewer than 2000-2300 milligrams of sodium per day, and most Lean Cuisines have almost half that. Some expensive sugar-free ice creams have more bad carbs per serving than the same amount of regular ice cream. High fiber granola bars are great, but watch the sugar content, because if you eat enough refined sugar it will undo all the good you're doing with the high fiber. Many of these things are just marketing gimmicks. I could sell you a sack of dirt with a "diet-friendly low-fat" label on it, but it's still just a sack of dirt.
My point is, in this case the frugal option is also the healthier one- fresh produce and lean meats, and stay away from processed pre-prepared food.
Also (and I've been meaning to do a blog post on this), the idea that carbohydrates are bad is a myth. Your body needs carbs for its basic cell functions, so cutting them too much will make you lose energy, and not eating enough vegetables and fruits can cause digestive problems. The important thing is to tell the difference between good and bad carbs. Good carbs are in fresh or frozen fruits and vegetables and whole grains. Bad carbs are in processed food, white breads and pastas, sugar, candy, syrup, etc. Keep up with the good carbs, and stay away from the bad carbs, and you'll see a difference.
The other super-important thing is to drink lots and lots of water. It makes you feel full, it helps your body flush out the dead fat cells after you've burned them off, it helps is digestion, and tons of other benefits. 64 ounces a day is what's recommended, but it won't hurt to drink more! Just try not to go over 100 ounces per day, because that's getting toward over-hydration.
Stepping off my soap box now! This is a subject that really gets me going.