Everyone has given great advice. I, too, suffer from a serverly underdeveloped VMO. It's practially non-existent in my left quad- despite all the specific lifting and exercises I do to strengthen it.
My problem with my knees is my feet. Figured out that the severe overpronation leads the knee to track wrong, causing the chrondomalacia. I just got orthoitics (after two years of taping my foot), and hope that helps.

From my two running friends that have had knee surgery- avoid it at all costs until it's absolutely the last remaining option. Get a second (or third) opinion. Just because he's the most revered doesn't mean his opinion of treatment is the gospel truth and the only way. See someone else in your area. Austin is a cycling mecca, and you KNOW there's got to be lots of other docs out there.

Probably didn't help much, but good luck and let us know how it all goes!