I first learned about alphabet boxes here on the Counting Coconuts blog. The concept is that you have boxes or drawers representing different letters of the alphabet and put tiny objects that start with each letter in the correct box...
I'm constantly collecting little trinkets for the girls in the $1 section of Target, craft store clearance sections and other places, so I've built up quite a collection of miscellaneous objects. I put some alphabet boxes together for the twins a while ago when they had just turned two years old (they're now 33 months old). At first they just wanted to play with the small objects inside instead of doing anything alphabet related (I can't really blame them - using the small cup and fork to feed the small animals is a lot more fun than sounding out words), but now that they are a bit older I've been taking the alphabet boxes back out again to work on our phonemic awareness and the girls are being a lot more receptive to organizing the objects by starting sounds..
Instead of plastic drawers, I found a storage box made of thick paper/cardboard on Oriental Trading figuring that the larger drawers will be able to fit more/larger objects, and maybe I can have the kids help me decorate the drawers (one day). Since there are only nine drawers, I rotate the letters and keep the contents of the boxes that are not currently in use in plastic zip-lock bags.
Each box/drawer contains uppercase and lowercase snadpaper letters for the girls to trace with their fingers. As well as a variety of objects that begin with that letter, including miscellaneous craft items, plastic animals, game pieces from other toys, mini-erasers, etc..:
Usually I let the girls pick a box, and empty it out, saying the names of all the objects. After they've emptied out all the boxes and had enough time to play and explore freely, I pick a letter and then we try to find all the objects that start with that letter, or I place all the letters on their boxes and we pick random objects and figure out where they belong. It's a lot of fun, and I've seen a noticeable improvement in how easily L and E are able to identify beginning sounds.
Later on, I plan on switching things up and using these boxes for different phonetic sounds (like 'ch', 'sh', 'th'), ending sounds, word families (rhymes), etc.. There are lots of fun variations, and I try to keep my eyes open for new trinkets to add to the collection to keep things interesting.