Yikes! Hopefully your Dr. knows what he is talking about and explained it was the RUNNING and not the squats that is causing your knee problems. Squats done correctly shouldn't be causing knee problems unless you're really overdoing it. Running on the other hand ...
Also, I hate to be the one to tell you, but the programs called Fat Loss do not mean you will lose fat. They are great workout programs but the only thing that will cause fat loss is ingesting less calories than you're utilizing. So the line ... "...say goodbye to your fat" in the book is only accurate if your diet is in line.
Another thing you may have read in the book is the whole "flux capacitor" garbage. The idea that you're going to fire up your metabolism and exercise all those pounds off continuing eating whatever you want is pure crap. (The book doesn't say this but it does suggest you can increase your metabolism .... which is false). EPOC burning up all that fat while you sit around and watch TV after a hard workout is also not going to happen.
I'm not down on the book, I learned a lot from it and many people here have had great results from doing the workouts. I feel compelled to explain a few .... misrepresentations ... the book makes regarding fat loss. (One fat guy to another) Also, I don't know how heavily muscled you are but there is a possibility you will actually lose muscle doing the Fat Loss routines if you do them while eating at a deficit. Doesn't sound like this would be an issue for you.
If you're looking to lose that fat ASAP there are better ways to go about it. If you're not in a hurry then eating at a reasonable deficit and going through NROL is a great plan. I was in a hurry so I went with Lyle Mcdonald's "Rapid Fat Loss". Now I'm doing SS, and perhaps I will go back to NROL in a couple months.
Finally, don't worry about lunges. You'll be able to walk eventually after doing them

.