What are merit badges? 
"The Scouting program emphasizes helping young men develop character, citizenship, and mental and physical fitness. Among the handful of methods used to build on these aims of Scouting are adult association, leadership development, and advancement.
Besides parents and relatives, schoolteachers, religious leaders, and possibly coaches, most Scout-age youth don't have much contact with many other adults or professionals. A Scout's association with his merit badge counselors provides an excellent way for him to grow and gain confidence through exposure to quality adults who serve as positive role models and mentors to him. Meeting people from business and community leaders to trained specialists and enthusiastic hobbyists, a Scout can experience a chance for personal growth and a positive life-altering experience while in pursuit of a merit badge."

How do merit badges factor into rank requirements?
The first three scout ranks (Tenderfoot, second class, first class) do not have any merit badge requirements. These ranks primarily focus on learning outdoor scouting skills.
The next three scout ranks (Star, Life, Eagle) focus more on leadership skills and include merit badge requirements.
Currently there are a total of 127 merit badges in the BSA program, which cover nearly every conceivable topic (see intoduction to merit badge PDF). Among other Eagle requirements, scouts must earn a total of 21 merit badges, which must include the following 12:

Star Scout requirements include earning a total of six merit badges including 4 from the Eagle list. Life Scout requirements include 5 more merit badges (11 in total) including 3 more from the Eagle list.

 How/where do scouts earn merit badges?
Merit badges are meant to be somewhat self driven (self leadership) however beyond summer camp, there are some organized opportunities throughout the school year as well. Our December Troop 1 merit badge college,  will allow scouts to earn additional merit badges.  The Patrol Leader's Committee will select the merit badges in advance and arrange for merit badge counsellors.  All scouts attending the December Troop meetings will be asked to attend one of these two merit badge workshops. Scouts not able to attend one or more of these sessions can still earn these badges however they will need to work through the material on their own and arrange to meet with the councilor separately for their final review. Individual merit badge booklets are available at the scout store (however a quick Google search will likely meet all your information needs).
Knox Trail Council sponsors a fall (November) and spring (March) Merit Badge College.  Registration for the fall college usually opens in September and registration for the spring merit badge college usually opens in December. 
The Knox Trail Merit Badge Colleges offers Scouts the opportunity to earn on up to 3 merit Badges in over 48 subjects.　 Materials will be sent by to you boy Council one month in advance and you will also be contacted by your Counselors with required work to do before the 1st session.
 
Costs for 2012 spring were: 
$35.00 per Merit Badge College - 3 badges
$30.00 per Merit Badge College - 2 Badges
$25.00 per Merit Badge College - 1 Badge
More specific information can be found at http://www.ktc-bsa.org/ during the registration periods.

How Can I Become A Merit Badge Counselor?
 
 "As a merit badge counselor, your mission is to join fun with learning. You are both a teacher and mentor to the Scout as he works on a merit badge and learns by doing."
 
Attached is an overview about becoming a merit badge counselor and well as a FAQ document and application form. If you’ve been wondering how you can get involved with the scouting program on a limited time-requirement basis here is your opportunity. There are 127 merit badges to choose from. If you’re a stamp collector, engineer, dog breeder, cyclist, architect, graphic designer, whatever, there is likely a merit badge that you would be more than qualified to teach once you familiarize yourself with the specific badge requirements. We could either set up additional merit badge workshops at future Troop meetings or you could schedule a session on your own time with a small group of interested scouts, or, just be on call if a scout shows an interest in earning a particular merit badge on their own and needs a counselor to coach them. There are already many adult volunteers on our Troop 1 and Knox Trail Council list but we always need more.