Michelle from Blogging from the Boonies wrote an entry about how she keeps track of her Compassion kids. Like me, her family has 10 children too, a combination of sponsored and correspondence kids.
I keep all the incoming letters in individual binders for each of the kids.
The letters only go in the binders after they have been answered. All incoming letters (Compassion and otherwise) go into a holder until they are answered.
It is easier to track my letters because I type them. Each child has a format that I use. The ones who speak English have a regular looking letter because they don't need translation. The ones that need translation have a 2-column format, with a lined column on the right for the translation. All letters have all the information and account numbers on the top.
Since I am writing on the computer, I have a folder for each of the kids. I keep copies of all letters in that child's folder, along with things like photos and anything else pertinent. When I'm writing a new letters, I pull up the old one to see what I said the last time. After the letter has been answered, I punch holes in it and add to the binder.
I also have a file for each child in their folder called "stuff sent" and I record what I included in each letter, so I can avoid duplication.
It's a pretty simple system, but it works very well for me.