How many individual lights can an arduino control
I believe using Charlie-plexing N lines controls N*(N-1) LEDs.
There is a good article on Wikipedia.

A friend of mine, Jimmie P. Rodgers, fit 126 LEDs on an Arduino Shield. 
He uses charlie-plexing to control the LEDs.
Some information on his board is at -- 
jimmieprodgers.com/2009/12/my-development-process/ (archive.org copy)



At the last Boston Arduino User Group meeting Jimmie P. Rodgers drew a
Charlie-plexing diagram as a matrix with labeled nets. Schematics drawn in this
manner seemed to do a good job of communicating the concept. I created
a couple of similar schematics -- See http://wiblocks.luciani.org/FAQ/faq-charlie-plex.html