squats and lunges are two exercises which can help increase lean muscle in your legs. What they won't do is help you lose weight. As others have noted, when it comes to losing weight, what matters most is what we eat. Good nutrition is what takes the weight off and keeps it off. Exercise is what keeps our bodies fit. In short, you can't outrun a bad diet with exercise. if you want to lose weight, you have to learn to eat right first.
As far as exercise, if you want to be able to do squats and take pressure off your knees, try doing ball squats. Using a stability ball helps reduce stress on a person's knees when doing a squat. So, check this out, you may find this exercise helpful. Don't use the handweights to start. just try the squats with the ball first. www.sparkpeople.com/resource/exercises.asp
Can you walk without any pain to your knees ? If you can walk without discomfort, take a daily walk. There are members who will tell you how they lost 100+ pounds just by walking and watching what they ate. Walking is a good weight bearing exercise that helps to increase lean muscle.
Because adding lean muscle is what will help you add some definition to your body. Take a daily walk as well as doing some strength training. Do you have a set of resistance bands ? If not, I'm going to encourage you to buy a set. you can find them for cheap at any walmart, target, sears or even tj maxx. If your knees hurt if you stand too long, you can do upper body strength training exercises while sitting in a chair.
In fact, if you check out the fitness section, you will also find cardio workouts that can be done while sitting in a chair. that will take stress off your knees too.
Mostly, if you want to lose weight, you need to eat right and watch your portions. If you want to see some definition (shape) in your legs and arms, you need to strength train and get a little cardiovascular exercise.