Programmer Rajkumar C Madhuram has demonstrated how easy it is to make your own music-playing device with an Arduino. His project can play five different Christmas-themed tunes and also control LEDs so they blink in relation to the music. This project would be easily embedded inside a variety of objects or decorations to add another level to the usual Christmas decorations. You can hear an example of the tunes in the following video:
If you're looking to embed one or more full-sized Arduino-compatibles in your project but would like to save some money, consider the Freetronics KitTen. This has all the features of an Arduino Duemilanove-compatible without the USB interface and is in kit form, saving you money while staying true to the Arduino form. For more information and to order, check out the KitTen page.