Hi! (Sorry--I'm not Cathe and I shouldn't be responding on her Ask Cathe forum!)
I have issues with my knees as well, although probably not as severe as yours. I have all of Cathe's weight training tapes, and modify them to suit my needs. However, I am able to throw in squats and lunges about once a week or so without trouble (as long as I have kept my cardio sessions mostly low or moderate impact). So, my suggestions might not work for you...
In place of squats, I do wall sits. Put your back up against a wall, or against a stability ball which is against the wall at back height, and squat down into position. As Cathe and crew do squats, hold your squat position, or as an alternative, simply bend forward at the waist as you remain in squat position: bend forward from the waist with a straight back as they squat down, and bend back up to neutral as they stand. If you do these correctly (excuse my poor description) they can really be killer on you quads, since you are holding the squat the whole time...
For lunges and step ups, I substitute a move I first saw on a Kathy Smith tape. They are similar to one legged deadlifts, but I think they target the glutes extremely well. Stand on your right leg with the toes of your left foot resting lightly on the floor slightly behind you. Lower down, without bending your knee (just have it slightly bent, not locked out, from the beginning) as if you are going to pick up something from the floor. You are bending from the waist here. Straighten back up. Keep doing these as the girls do lunges, then switch legs when they do. Although these don't target the quads, you are getting good all over leg work and balance work, (as you get better with balance, lift that rear leg up behind you as you bend down, and only lightly touch behind you if you begin to lose balance), and you will hit your hamstrings and glutes quite well.
Cathe's PSLegs, her Pyramid Lower Body, and her new Legs and glutes all have excellent floor work routines. String them all together for a great workout, and use the above substitution moves for the squats, lunges and step ups if you feel they will work for you and not compromise your tender knees!
Good luck

Wendy