Sounds like chondromalacia, that's what keeps me from running and why I found cycling (crikey I wish I found cycling sooner -- it's so much more fun for me than running!). My knees were well past the crunching stage into very painful catching and locking. I couldn't walk 15 steps without ending up in tears. The cycling and certain leg excercises were recommended -- two cousins are physical therapists, handy don't you know! -- and the difference was noticable almost right away. (the point being to strengthen the proper muscles to force the kneecap to track properly).
I found the clipless pedals did help -- Speedplay X series are very highly recommended for that particular knee ailment, and I agree, I love them -- as did making sure I wasn't pushing too hard a gear. Even now, if I take a hill too hard my knees feel it first. I also have to make sure I don't monkey around with saddle position too much ... too high or too low is tough on my knees too, and even too far forward or back.
But thats just my situation ... I'm not qualified to offer medical advice (if I was maybe I wouldn't be such a wreck all the time!). I just know that worked for me. I'm sure there are more knowledgable people who can chime in.