"i dont know how to process the sound to know when to switch lights."

Depends what sort of effect you're after!

"Anything to do with FFT?"

FFT will give you frequency spectrum info - so if you want tone dependant effects, it might be useful.
But ordinary filtering might be easier.

If you want want sequencing, where the steps are synchronised to the beat of the music, that'd be more of a time-domain thing.
It's depend on whether you're taking a full mix as input, or if you can get, say, just a mic on the kit.

Or you could have effects based on the sound volume

For filtering and stuff, you might want to look at the Cypress PSoC
http://www.cypress.com/products/...al%20Array
sorry, not 8051-based :-(