Quoting wikipedia.org's article on Squats:
Another error where health of the knee joint is concerned is when the knee is not aligned with the direction of the toes. If the knee is not tracking over the toes during the movement this results in twisting/shearing of the joint and unwanted torque affecting the ligaments which can soon result in injury. The knee should always follow the toe. Have your toes slightly pointed out in order to track the knee properly.
Here's an illustration on wikipedia of a squat:
It looks like this persons form is bad because their toes aren't slightly pointed?