Here's a really simple craft that's quick to make:
Behold an ordinary old shoe box. I don't think I need to explain much about it. As they say: "A picture is worth a thousand words". The only tricky part might be cutting out the opening. A sharp stanley/utility knife makes the job easier and neater. I use PVA glue to secure the shoebox to the lid and a white undercoat to stop any writing on the box showing through. I had a old raggedy brush that kept shedding hair and didn't give a nice even finish so I made a virtue of the brushes shortcomings and went for a stippled finish which hid the problem.
A big part of the fun in decorating this sort of project is trying to use whatever you have on hand. Kids love doing this and, from a creative point of view, it's really interesting...you can't over-plan the design...you just work towards a balance until everything works. Using trims (I have a big box of these) gives sharp strong lines of colour.
The curtain is threaded onto a bamboo skewer which is then inserted into a hole at either side of the box. A wooden bead on both ends of the skewer stops it sliding out when you open and shut the curtain. The puppets are just plastic tea spoons. There are all sorts of things around the house that make AMAZING puppets. Jim Henson's Muppet Workshop has published fantastic books on this subject and will open your eyes to how to make ordinary household stuff into colourful companions for your kids.
Here's a snapshot of the actors posing with their stage:
If you have any questions feel free to ask...oh, I also have to mention that a version of this idea appeared in Family Fun magazine (my contract with them requires this little bit of advertising on their behalf).