Diet and habit changes are the first step, yes. Generally, eat healthier food, raw or lightly cooked veggies when you can, and up your protein. Protein availability + some basic lifting/bodyweight exercises (push-ups, sit-ups, pull-ups, deep squats, etc.) will lead to building muscle, which incinerates fat. Cardio is needed and if you have knee problems, running will be very difficult, uncomfortable and painful. The elliptical machine takes the stress from hitting the ground, and the heavier you are, the more you feel it while running. The bike is also good. Swimming is AMAZING for cardio, and in a short amount of time, I'm going to re-incorporate that into my running/kung fu/lifting routine.

What you're really in need of is extended cardio. For the first half hour or so, your body is running on immediate energy reserves (what you've eaten that day). After that initial half hour, your body switches over to pulling energy from reserves. So use a half hour of exercise as a bench mark. Target heart-rate should only be at about 60% or so. Basically, you want mildly strenuous activity for MORE than half an hour. You don't have to go crazy with an exercise regimen unless it's your prerogative to do so. Good luck!