Decide how big you want it. A channel is a unit of lights that can be controlled individually. For example, a single bush in your yard may be a channel. All the lights in a channel work as a unit (you can't flash an individual light bulb). 32 to 64 channels is a good size to start with.
Stock up. The best time to buy lights is the day after Christmas. Many times you will find lights that were normally priced around $2 a strand fall to $0.50. Check out Wal-Mart, Target, Lowes, Home Depot, K-Mart, etc.
Obtain a control system. You will need hardware that hooks up to your computer. You can buy a system completely built, a kit, or a full do-it-yourself system.
A fully built system will work right out of the box. It will cost you about $20 - $25 per channel. It can be purchased from online vendors. Choose this option if you do not want to do any electric work (especially soldering.)
A kit will cost from $15 or so per channel. It's pretty much the same thing as in their fully built product without the enclosure. Because it is very simple to place an electronics board in an enclosure, this may be a great option to save you money. Some vendors sell everything you need to build a control system, including the bare circuit board and the parts. If you are willing to solder a little bit, check this out.
A do-it-yourself system has a very low cost of $5 per channel on up. The price depends on how much you actually do yourself. A system consists of a controller, which communicates with your computer, and solid state relays (SSRs), which actually switch the lights. SSRs can be bought or made yourself. With a do-it-yourself option, you will spend lots of time making your hardware, but the cost savings can make up for it. You also have total customization of your hardware, and will be able to fix problems easily.
Get help. This can be a very big and complicated project, and often can seem overwhelming if you're just getting started.
Get software. If you buy commercial products, they have software available for purchase. There is also free software available for Do-It-Yourself systems. If you're ambitious, you may wish to hand-code a program in almost any major programming language (usually not for pre-built products, as most of their protocols are closed-source).
Design your display. Design the actual outside portion of your display. Common elements to include are:
Mini lights or net lights on landscaping
Icicle lights or c-series lights on roof
Mini Trees These are 2 to 3 foot tall trees, often made of tomato cages wrapped in lights of one or multiple colors. They are arranged in a line or a triangle and are very useful in an animated display.
Mega Trees This usually consists of a large pole with lights extending from the top to a large ring around the base. Again, it is very useful in animation.
Wireframes Metal frames with lights attached.
Blowmolds Plastic lighted sculptures.
C9 Lights on yard perimeter
Deer, trees, etc. purchased from store
Program your show. Here comes the time consuming part! Decide on music that you will synchronize to, then start programming on your time grid. Don't do everything at once. This will probably take a couple of months to several, depending on how long your show is and how many channels you have. How to do this varies by the software program you choose.
Let them hear you. Use a way that will create a spectacular sound yet keep everybody at peace. Speakers playing the same music over and over again would drive the neighbors crazy, so in most cases you will need to broadcast over an FM frequency.
Get powered up. Make sure your home has enough outside power to run your lights. A typical mini light strand draws about 1/3 amp. Speaking of power, computerizing your display will have a lower electric bill than a static display. This is because not all the lights are on at once.
Set up.
Maintain your display. Go outside every morning and check your display. Repair or replace broken lights or damage caused by weather or vandals. Make sure things are ready to run the next night.
Talk to neighbors and police about possible issues with traffic flow, noise, etc. It is much easier to prevent problems than to correct them. However, make sure they understand that there might be problems, not that there will be problems. People need to know what to expect, but don't stress things so that they shut you down before you even start up your display!
Use your time wisely. This is a big project, so don't be afraid to get help or try to do things more efficiently.Try to take your time for checking your lights and making sure there are no fire hazards!
Signing up for the forums at Christmas lighting sites is a good idea. You will get help from others and help others.
FPGAs make fantastic custom control devices, which can hook between an RS232 connection on a PC and a relay board for the lights. An entry level Spartan 3e Xilinx demo b