As the others have noted, we can't spot reduce areas of our body we don't like. When it comes to gaining or 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 and watch your portions first.
Now, speaking as someone with bad knees, what you do depends on your knees. Perhaps the reason you have pain when doing squats is because you're not doing them properly. Squats may seem like simple things, but doing them with poor form can cause knee pain. Do you have a gym membership ? if so, take a group weight training class. Have the instructor watch your form. They will correct it. that should help.
You could also consider doing squats with a stability ball. This is an example of a ball squat. This should help take pressure off your knees. www.sparkpeople.com/resource/exercises.asp
Can you walk upstairs without any discomfort to your knees ? If you can climb stairs, take the stairs whenever you can. Walking up stairs is an excellent activity that will help strengthen your lower body.
Mostly, can't emphasize enough the importance of eating right and watching your portions if you want to lose weight. We don't get to decide where the weight comes off. However, with a nutritious diet and a little exercise, you will lose weight off your entire body with time.