John - I'd completely disagree with you here. Knee circles are definitely on my exercise black list. I have been warned away from them by every modern phys ed trainer I have spoken to, including the trainer that ran the British Aikido Board Coaching Course last weekend. Knees are not designed to move that way, and this exercise can cause permanent damage. Unfortunately it is an exercise that has traditionally been done, so people still do it. Coincidentally(?), many martial artists suffer from bad knees. At least bunny hops are now off the regular warmup curriculum. I hope that knee circles will be soon as well.
Daniel, my two recommendations for your knees when warming up are (1) make sure you put no sideways strain on them as this is not how they are designed to work, and (2) do not bend them past 90%. This should help you keep them healthy for a long time!