What knives do I really need?
If you follow the prevalent methods of cooking in the US or Europe, the chef's knife is king. If you learn to use it properly, an 8" Chef's Knife will service for 90% or more of your culinary cutting needs. It can be used to chop or slice any manner of vegetable, slice meats, section a whole chicken into parts, chiffonade basil, mince garlic, slice tomatoes paper thin, dissasemble fresh pineapple, whatever you like. A nice 3.5" paring knife will fill in for coring strawberries, trimming fat from roasts, store bought chicken breasts, etc. A scalloped bread knife, and a few partially scalloped steak knives, and you'll be set. If you do a lot of fish, a 6-7" filet knife might be a valuable addition.
With all of those knives, I am referring to traditional bladed knives. One of the saddest things I've seen is "sets" of knives; with a chef's knife, carving knife, various 'utility' and paring knives in a wooden block set -- all serrated. The cooking snob in me shudders when I encounter these things. I am not against serrated knives. If you wish to use serrated knives for their simplicity, that's fine. But at least keep around a decent traditional blade, also. Sometimes, it's really the far superior tool.
I personally prefer a 10" chef's knife to an 8" chef's knife -- I find I have all the control and flexibility of the 8", yet the additional length for carving really large roasts, slicing massive heads of cabbage, cutting unruly heads of romaine lettuce, or whatever.
How do I know what knife to buy?
Most kitchen knives sold are stainless steel of some kind. Although these knives can never be as sharp as a high carbon (not stainless) steel knife, they still provide a good edge with a high resistance to rust and discoloration. If you positively must have the sharpest knife around, get a high carbon non-stainless blade (or perhaps a ceramic blade). For the rest of us, stainless steel is perfect. Generally speaking, the quality of steel used in most knives is decent. Higher carbon content is better, but you'll be unlikely to be able to find a percentage listed anywhere, so this is rather moot. Avoid knives with plain wooden handles if you can, as eventually the wood will warp, crack, mold, whatever. Stabilized woods or laminates are okay, as these have been processed and stabilized with resins and such to prevent warping and cracking. Ideally you want a knife with a full tang -- this means that the steel used for the blade goes all the way to the back of the handle. This provides a strong, sturdy knife. The best knives will be flat ground, meaning that a cross section of the knife is basically triangular. Cheaper knives will be hollow ground or simply have a bevel ground into them near the edge.
Most importantly -- buy something that feels good in your hand. If it doesn't feel good in your hand, you won't feel comfortable using it and you won't have optimal control over the blade. It doesn't matter if the knife costs $500 or if Emeril Lagasse says it's the best knife in the world -- if it doesn't feel comfortable in your hand, find something that does.