TL:DR version:
PRIME MK2 Rule Book: Has rules for starter set models and some new stuff
Faction Book: Rules for EVERY MODEL released for faction as of end of 2010.
Card Decks: Mk2 cards for every model from Mk1, does not include cards for models released after Jan 2010 (so does not include every model from faction books)
Mk1 Expansions (Legends, Escalation, etc): No valid under current rules, all game content covered in faction books, fiction still interesting
Mk2 Expansions: WRATH is first new expansion under Mk2, comes out next month. Should be great.
Cards in Blisters: Every model off the shelf comes with its rules, so no reason to buy more books than base rule book unless you want to know what every model does for list building, you can play the game perfectly well without the faction books.
The Mark 2 rule book ("PRIME") has enough models to start playing any of the original 4 factions. The Faction books that were released last year have ALL the models that were ever released for the faction (up to the time of the book's publication) updated for the second edition rules. They also have a lot of fiction, history and 'fluff' for the faction, and are interesting just from that perspective too.
You don't actually 'need' the book to play though, because each model when you buy it will come with the card that has the rules for that model. So if you just bought models off the shelf you'd have all their rules without needing the faction book. If you trade for somebody's models and they don't have cards you'll probably need the book, or need to purchase the decks of cards that are available.
The expansions that came out before last year are no longer relevant to the rules (though they have fiction in them that explains the current game world). The next current-edition rules expansion is "WRATH" and it comes out next month or late this month I think. It will have new units for each of the 6 warmachine factions (probably 1-2 warcasters, 2-3 jacks, 2-3 units and 2-3 solos as well as a battle engine for each faction). It will also update the fiction, since unlike the GW universe the WM universe is actually changing in real time as they release new books.
Hope that helps.