The wonderful classic story The Gift of the Magi by O'Henry is beautifully illustrated by P.J. Lynch. I love this story. It is one of my favorite stories of all times. I re-read it each year to remind myself what the season of giving is all about. 
Mortimer's Christmas Manger written by Jane Chapman and Karma Wilson is a delightful tale of a mouse who is looking for a new home. He finds one in the families creche. One night he hears the father of the house tell the tale of Christmas and realizes that his "house" belongs to the Baby Jesus. It brings home the lesson of how it must feel when there is "no room at the inn". A clever, humorous story that is brightly illustrated to please the 5-8 year old audience.
In the Depression era tale The Gift of the Christmas Cookie: Sharing the True Meaning of Jesus' Birth by author Dandi Daley Mackall, Jack and his mother are struggling to make ends meet. Christmas is approaching and Jack's mother begins her annual baking. She shares the tradition of how the woodcarvers in the middle ages would use the molds and cookies to tell the story of Jesus. Illustrator Deborah Chabrian chose sublime watercolors to relay Jack's emotions throughout the book. Wonderful storytelling!
Fear Not Joseph!: A Story of Christmas written by Julie Stiegemeyer and illustrated by Cheri Bladholm tells the Christmas tale from Joseph's perspective. He was a humble man who God chose to be the earthly father of His son. Oh what that must have been like! 
The Drummer Boy is written and illustrated by Loren Long, one of my favorite author/illustrators. The description from Amazon says it best: Labels: Mary's Book Basket