My league has a "Prospect Draft" every year beginning on December 1st. The draft is three rounds, and only includes players that have FEWER than 130AB's or FEWER than 50 innings pitched. So lets say that in 2009 I drafted Carlos Santana in Rd. 1, Michael Ynoa in Rd. 2, and Martin Perez in Rd. 3...(which I did). The 2010 season arrives, and during the year, I "activate" (meaning I add him to my active roster), Carlos Santana. At the point in which I add him to my fantasy team, he is no longer considered a "prospect". I can either make him one of my "major league" keepers at years' end, or not keep him at all, in which case he would be eligible to be drafted in the following years' draft.
At the end of the fantasy year, everyone in my league must declare who their major league keepers are, as well as if they would like to keep or release any of their minor leaguers. In my case, I had activated (and kept) Carlos Santana on my major league squad, and I decided to dump Michael Ynoa. So in this year's draft, I have a pick in Rd.1 and Rd.2 of the prospect draft, but not Rd.3, (because I kept Martin Perez.)
The beauty of our prospect system is that it allows each team to have a "farm team" in which they can just let talent marinate until they are ready to 'call them up'. I probably didn't cover every aspect of it, but let me know if you have any questions.