Well teams are broken up into 4 catagories. Teams with 7 wins or less (i believe), teams with 7 wins or more that didn't make the playoffs, teams with 7 wins or more that made the playoffs, and teams that made the playoffs.
Then the first group of lossers (which we are in) get a chance to bid a 2006 draft choice for the player. I believe it is done silent auction style. You say "i'll give a 4th round pick next year for player X". If everyone in our pool bids a 4th rounder, it goes by draft order, so SF would be #1, and then Miami #2. If someone in that pool bid a 3rd round pick and everyone else a 4th, then the player goes to that team automaticly. If no one in that pool put in a bid, it goes to the next pool of teams.
That is pretty much how it works. My explanation my not be exact, but that is the basics.