Not quite how it is reported on their website:
http://www.uefa.com/uefa/news/Kind=128/newsId=297230.html
Academy plan
Under the proposals, the 'A' list that teams submit for UEFA club competitions would continue to be limited to 25 players, and from season 2006/07, at least two places on this list would be reserved for players trained by a club's own academy with a further two places for players trained by other clubs from within the same association of the said club.
Extra places
In the following two seasons, one additional place for a club-trained player and one additional place for an association-trained player would be reserved on the 'A' list, so that by the 2008/09 campaign, each club would have in its 25-man squad four club trained and four association-trained players.