I only use the knee thing for Tekken. It's actually more like a thigh thing, but whatever.
For just about all other fighting games I hold the controller normally in both hands (Especially 2d fighters where the shoulder buttons are needed, because it's pretty much impossible to use the shoulder buttons if your hand isn't wrapped around the controller.)
As for the best D-Pad, the DS2 wins hands down. The Xbox d-pad is too far to the right. And the Dreamcast d-pad sticks out way too far, and is way too sharp. I haven't played fighters on the Cube, so I can't say much about that.
And for those whining about GGXX on the DS2 -- I remember after playing GGXX for the first time saying how much more forgiving the game's controls were than other 2d fighters. I mean, compare Akuma's half circle forward, half circle forward super is SFA3 to any of the supers in this game. I don't see how anyone can complain about difficulty of pulling off moves in GGXX, even if they don't like the DS2.