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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the

Securities Exchange Act of 1934

For the month of April 2009

Commission File Number 1-13758

PORTUGAL TELECOM, SGPS, S.A.

(Exact name of registrant as specified in its charter)

Av. Fontes Pereira de Melo, 40
1069 - 300 Lisboa, Portugal

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

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Portugal Telecom

Annual report _ 2008

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Annual report 2008

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Portugal Telecom, SGPS, SA

Public Company

Share Capital: Euro 26,895,375

Registered in the Lisbon Commercial

Registry and Corporate no. 503215058

Avenida Fontes Pereira de Melo,

40 1069-300 Lisboa

The terms “PT”, “Portugal Telecom Group”,

“PT Group”, “Group” and “Company”

refer to Portugal Telecom and its

subsidiaries or any of them as the context.

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Making a difference to everyone’s life

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6.734

million Euros

Portugal Telecom’s consolidated income increased by 9.5% in 2008, driven by the

growth in its mobile businesses, TMN and Vivo.

1.242

1,242 million Euros of investment in new generation

technology and client-associated investment, due to strong

growth in the television business.

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70.000.000

70,000,000 clients — Despite strong competition in all the markets where it operates,

Portugal Telecom increased its client base by 28%.

Over 200 million Euros of investment in the Information Society.

Innovation

In 2008, Portugal Telecom invested

150 million Euros

in innovation, research and development,

which represented 2% of the Group’s consolidated income.

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Portugal Telecom

Portugal

(1) These investments are accounted for under the equity method. (2) These stakes are held by Africatel, which is controlled 75% by PT. (3) Revenues in 2007. As of the date of this report, UOL had not released yet its full year 2008 results

Support companies

Systems and IT [PT Sistemas de Informação 100%]; Innovation, research and development [PT Inovação 100%]; Backoffice and shared services [PT PRO 100%]; Procurement [PT Compras 100%]; Call centres [PT Contact 100%]; Pension funds management [Previsão 82.05%]

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Portugal Telecom

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Message from the Chairman

Chairman’s message

PT is also a company with major ambitions in both the domestic and international markets, and I’m confident that PT will continue to be a top player in the international telecommunications market, making a positive contribution to the creation of value for stakeholders in general, and for shareholders in particular.

This was also the three-year period in which PT consolidated its practices of sustainability, involving its staff, suppliers and also its clients.

With the presentation of the 2008 full year results, the mandate of the Board of Directors, which started on 21 April 2006, will be concluded.

The Board of Directors, elected in a context of turbulence due to the launch of a hostile Public Tender Offer, presented to the Shareholders a strategic plan for the future of PT that was approved by a large majority in the most participated Shareholders Meeting of PT’s history, which took place on 2 March 2007.

In the event that the proposal of the Board of Directors to pay a Euro 0.575 dividend is approved by the upcoming General Shareholders Meeting, the shareholder remuneration programme initiated on 2 March 2007 will be fully completed. This programme amounts to Euro 5.8 billion, implemented through the payment of dividends, a share buyback and the spin-off of PT Multimedia.

This programme was completed without jeopardising the financial situation of the Company and without compromising its investment capability, establishing a new configuration in the telecommunications market, in PT’s structure and in its product and service offering.

The appearance of the subprime crisis and its consequences in economies and markets

The three-year mandate of this Board was also marked by profound changes in the world macro economic environment. In effect, when, in middle 2007, the first signs of the subprime crisis came up in the United States, only a few anticipated the effect that such crisis would have in terms of undermining confidence in a way never seen before, progressively contaminating developed economies and emerging markets, causing a widespread slowdown and, eventually, a recession, aggravating social imbalances. Financial markets are now characterised by a new attitude towards risk, having changed the perception about financial leverage. In this context, the decision taken by this Board of Directors, of maintaining as a priority the objective of keeping the Company in investment grade rating, becomes even more relevant.

However, the impacts of the crisis caused by subprime mortgages and the various forms of derivatives have not only been reflected in financial markets, but have also dragged developed economies into significant slowdown or even recession in some cases. Although the Portuguese economy is not directly exposed in a relevant manner to the financial products that caused the crisis, it has suffered, in 2008, with the slowdown of its main trading partners. In this context, the economy slowed down from a 1.9% growth in 2007 to a 0% growth in 2008. This crisis, whose depth and contours remain to be accurately dimensioned, is a challenge not only for the Portuguese society but also for Portugal Telecom.

Aiming to better prepare itself for a more complex environment, PT has been focused on adapting its organisation to the new market reality, striving to extract efficiencies through infrastructure convergence, sharing best practices among the

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various business segments, focusing on the upselling of services to its customers and establishing relations of partnership with its suppliers.

A triennium marked by change: in the sector and at PT

The 2006-08 triennium was marked by a structural change in the telecommunications market, which was underpinned by the voluntary spin-off of PT Multimedia on 7 November 2007. This was, in fact, the major liberalising act of the telecommunications sector. As such, PT proactively contributed in a structural and decisive manner to the most important measure to increase competition in the sector.

The triennium was also marked by a profound evolution in the organisation of PT in the domestic market, by evolving its business portfolio, extending its service offering to pay-TV, and creating bundled offers with the various products, further exploring the paths opened by technological and market convergence.

In what concerns the balance between home and international operations it is worth highlighting the positive contribution of all international operations. Among these, Vivo, the leading mobile operator with 45 million customers, stands out. Vivo reinforced its competitive positioning by implementing GSM in record time, by obtaining nationwide coverage and by launching 3G services. The converging vision of Vivo’s controlling shareholders, which continues to be focused on increasing the value of the asset, contributed to the implementation of this restructuring process.

It is also worthwhile underlining the growth of the other international assets that are part of PT’s portfolio. As such, the contribution of other international assets to the consolidated accounts of PT represented, in 2008, 49.6% of revenues and 26.7% of net income. These indicators compare very favourably with 37.6% of revenues and -9.3% of net income in the beginning of the mandate.

The distribution of dividends relative to the fiscal year 2008 recently disclosed by Vivo, which has an impact of Euro 44 million on PT, has a symbolic meaning, going beyond its cash impact. This distribution compensates the effort and appropriateness of the guidelines and the investments established by the Board of Directors concerning Vivo’s restructuring.

PT continues deeply involved in the creation of a sustainable society

This was also a period in which PT intensified its sustainability practices, envolving its employees, its suppliers and also its customers, striving to concentrate its efforts in eco-efficiency, in obtaining synergies and sharing best practices among group subsidiaries. It is also important to emphasize the establishment of a task force to define the group energy strategy. As a result, PT was able to reduce its carbon footprint by 11.5% per annum in the past three years. It is also worthwhile mentioning the conclusion of the certification processes of the management systems of PT’s subsidiaries in Portugal complying with international standards — ISO 9001 — quality; ISO 14001 — environment; OHSAS 18001 — occupational hygiene, health and safety, as well as the creation of the Sustainable Model for Supplier Selection and Contracting.

PT has strong ambitions for the future

PT has reaffirmed itself in this period as a Company of reference and a flag in the development of information society in Portugal, with the implementation of various projects, among which we highlight “e-escolas”. With 70 million customers worldwide, representing a 55% growth as compared to 2005, PT is already a global Company. But, at the same time, PT is also a Company with strong ambitions for the future, both in the home and international markets, and I am confident that PT will continue to be a player of reference in the international telecommunications market, contributing positively to the creation of value to all stakeholders in general, and to its shareholders in particular.

Henrique Granadeiro
Chairman

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Message from the CEO

CEO’s message

In 2008 PT consolidated its position as leader in the domestic market. Meo brought new opportunities to the fixed network, there was investment made in convergence, the reorganisation was attentive to the needs of each individual sector and the promotion of sustainability gave a clear signal to clients and partners that PT is a socially responsible company.

In 2008, Portugal Telecom changed. We changed as a company, we changed the market where we operate and we changed the habits of the more than 70 million customers we serve all over the world.

In a year marked by the expansion of the subprime mortgage crisis to the financial markets and the world economy and, internally, by an increased competition with the consolidation of a new operator, I cannot help but feel a sense of accomplishment and personal satisfaction with the results that your company achieved in 2008, in many cases surpassing the goals we set out a year ago.

A new market approach

One of the first steps we took was to adapt the organisation to its future challenges. Internally, the creation of PT Portugal through the organisational merger of PT Comunicações and TMN was a historical milestone for the company, representing a turning point in terms of efficiency and operational agility of the various business areas.

Reaffirming its commitment to the customer, PT abandoned a structure organised around fixed and mobile platforms, and changed to a structure centred on the specific needs of each segment, implementing a new organisation around five customer segments: Residential, Personal, SME, Corporate and Wholesale.

In order to continue to surprise the market consistently with innovative services, we took important steps to reinforce our internal culture of innovation and risk—taking, as one of the main drivers of growth and performance at PT. We thus created the conditions for the development and sharing of new and differentiating ideas, involving the whole organisation in the innovation process of new products and services, business concepts, customer experience levers and operational efficiency improvements.

Domestic market

In 2008 PT also reinforced its leadership position in the domestic market and confirmed the success of its three strategic priorities outlined: the launch of meo, the TV of the future, the achievement of mobile broadband leadership and the focus on the SME segment through innovative and convergent products, such as the Office Box solution.

In the Residential segment, we witnessed a historical inflection in retail line loss on the back of the success of meo, a triple- play offer based on a new TV experience in Portugal, offering a wide choice of channels, video-on-demand, high definition (HD) and latest generation set-top-boxes with digital recording and electronic programming.

In the year of its launch, meo reached more than 310 thousand customers. This growth compares very favourably with the peer group in Europe, and was the reflection of a young and irreverent brand that reached record levels of awareness, as well as

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the continuous introduction of innovative services, such as the launch of video-on-demand for the first time in Portugal. Worth highlighting is also PT’s victory in the digital terrestrial television (DTT) bid, which should enable us to strengthen our multi- platform strategy with national coverage, thus further contributing towards the growth of the pay-TV market in Portugal.

In the Personal segment, we consolidated our leadership position, in particular in mobile broadband, with our customer base more than doubling when compared to 2007. We also won several independent awards recognising the quality of TMN’s network. In 2008 our strategy focused on reinforcing our presence in the various regions in the country and specific segments, such as the youth segment.

In the SME segment, we clearly focused on the potential of fixed-mobile convergence. Through the launch of the Office Box solution, which includes, on a single package with simplified pricing, fixed and mobile voice services, fixed and mobile broadband, last generation hardware and an integrated support service, PT became a reference in providing an integrated service of telecommunications, with productivity tools and support services included.

In the Corporate segment, we consolidated our market position, winning an important number of new contracts for telecommunications solutions, as well as outsourcing, network management and IT solutions customised to the needs of our clients. Worth highlighting is also all the work developed in the education sector, where our vision for the future consists in providing our education system with one of the most modern telecommunications networks and, via the e-escolas programme, place it at the forefront of leading technologies, with students throughout the country benefiting from new working methods, internet access and increased literacy levels in IT tools.

International Market

In the international market, we achieved our best results in many years, confirming our two strategic priorities, namely consolidate Vivo’s turnaround and increase our proximity with all other international operations by leveraging on PT’s know- how, and reinforcing our strategy of being present in high growth markets, particularly Brazil and Africa.

In Brazil, we confirmed the successful turnaround of Vivo. The period was characterised by solid growth and by the reinforcement of our leadership position in the mobile market. Worth highlighting are the implementation of the 3 G network in the country and the achievement of national coverage, through the expansion of our presence in the Northeast and through the conclusion of Telemig’s acquisition in Minas Gerais.

In Africa, we focussed our management on superior operational execution, reinforcing the sharing of know-how and best practices, and strengthened our team in all African countries where we operate. These vectors and the work done with our local partners were a cornerstone for the significant growth achieved across the board.

Sustainability and Social Responsibility

2008 was marked by the reinforcement in our commitment towards sustainability and social responsibility as an integral part of our strategy.

PT is determined to promote the future sustainability of our society, both through its direct impact, by reducing its carbon emissions and energy consumption, and through its indirect impact, by promoting the dematerialisation of our day-to-day activities and reducing the carbon footprint with the products and services that it provides to the market.

Also noteworthy was PT’s focus on promoting the social wellbeing of its employees and society. Internally, this focus was evident, for example, in a set of scholarships provided to the children of our employees, free access to our internal libraries and voluntary work during work hours. Externally the initiatives led by Fundação PT, one of the largest Portuguese foundations associated with an economic group, were also of particular importance.

Future Perspectives

Notwithstanding the market’s competitive environment and the current domestic and international economic outlook, PT will continue to reinforce its strategy based on a clear focus on innovation and on exploring all the growth potential of its domestic and international assets.

We will continue to execute our vision for the sector, with particular incidence on fixed-mobile convergence and on integrated multimedia solutions. Our strategy will encompass a multi-platform approach, with the implementation of our DTT network and, under the appropriate regulatory framework, the investment in a fibre network that will radically change the way we all live and work in Portugal.

Internationally, we will continue to explore both Vivo’s full growth potential and the synergies of our current international portfolio. Furthermore, we intend to increase our exposure to high growth markets in a selective manner, with particular focus in Africa.

The challenges and opportunities that we face inspire us to realise our vision of transforming the society in which we live. I would like to thank the support and trust we received from our shareholders, the commitment and professionalism of our staff and the trust of our customers and suppliers, without whom we would not succeed in fulfilling our vision for the future.

Zeinal Bava

Chief Executive Officer

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01 _ Macroeconomic environment

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The worsening of the subprime mortgage crisis became a general crisis of confidence with repercussions in international financial systems and markets. The collapse of financial institutions in the USA and Europe caused reluctance on the part of institutions to invest in money and credit markets.

The worldwide economic downturn

2008 was marked by the extension of the US subprime credit crisis, which gradually developed into a widespread confidence crisis affecting the global financial system and economy.

The increased perception of the liquidity and solvency risks, coupled with the bankruptcy or loss of independence of some financial institutions in the US and in Europe, resulted in an almost complete reluctance of most financial institutions to expose themselves to each other in the money and credit markets.

The scarcity of liquidity in the private sector was particularly visible between the end of the third quarter and the beginning of the fourth quarter, despite the aggressive intervention of the authorities to ensure the normal functioning of the markets.

In the euro zone, the 3-month Euribor interest rate rose from 4.68% at the beginning of 2008 to a maximum of 5.39% in October, but ended the year at 2.89%, after the reference rate cuts and the strong liquidity injections into the money market carried out by the European Central Bank (ECB).

Euribor and Libor interest rates

Source: Bloomberg.

The risk- averse environment was also visible in the performance of the Euribor rate spread when compared to the 3-month Treasury Notes, which jumped from 88bps to a maximum of 350bps (also in October ), before ending the year at a lower, though still relatively high value (124 bps when compared to values close to 20 bps in the Summer of 2007).

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The growing uncertainty, particularly in the financial sector, and the expectation of a global economic downturn have strongly penalised the main stock market indexes in 2008. In the US, the Dow Jones, Nasdaq and S&P 500 indexes fell by 33.8%, 40.5% and 38.5%, respectively, while in the euro zone, the DAX, CAC40, IBEX and PSI20 fell by 40.4%, 42.7%, 39.4% and 51.3%, respectively.

The high volatility was also observed in the commodities markets. In the first half of 2008 oil prices soared, reaching a value close to USD 150 per barrel in July. This climb in oil prices was mainly due to a strong demand in emerging markets, to the expansion difficulties on the global supply side, and, in particular, to speculativeon movements. The expected demand slowdown and, later on, the increased probability of a global recession scenario withdrew support to thefor speculative demand movements and contributed to a strong correction of in the barrel price, which closed the year at values close to USD 40, notwithstanding the cuts in production.

Oil prices (USD and EUR/barrel)

Source: Bloomberg.

The same correction trend was observed in the non-energy resources, which altogether have contributed to a decrease in the inflation rate, as well as in inflation expectations, at the end of the year.

The more restricted monetary and financial environment, the lack of liquidity in the capital markets, the strong rise in inflation and in the prices of commodities in the first half of the year, and last but not least, the significant drop in confidence levels among economic agents have fuelled a slowdown or even a contraction of the major developed economies.

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Portugal

Even though Portugal was not directly exposed to the subprime crisis, the Portuguese economy suffered, in 2008, the impact from the confidence crisis in the international financial system, from the rising costs of commodities in the first half of the year, and from the slowdown of external demand. Within this context, GDP growth slowed down from 1.9% in 2007 to 0% in 2008, with two consecutive quarterly drops in economic activity during the second half of 2008.

This scenario was due to the sharp decline in exports, with the annual growth rate falling from 7.6% in 2007 to just 0.6% in 2008, and to the stagnation in investment, which decreased by 0.8% when compared to an increase of 3.2% in 2007. It should be noted, however, that Portuguese exports to Angola, the Magrebe and other regions in Asia and South America were particularly dynamic.

Gross Fixed Capital Formation was affected primarily conditioned by a more restrictive global financial and monetary environment and by lower demand expectations, which could be observed via in the downward trend, throughout the year, of the main indicators of business confidence.

Altogether, in 2008, private consumption showed a slight decrease, with the annual growth rate decreasing from 1.6% to 1.4%. This implies a growth rate that is still higher than GDP growth and suggests a further decline of the savings rate of families to a level of around 5.5% of GDP. Despite the negative trend in the private consumption confidence index, household spending was supported in the second half of the year by decreasing inflation levels.

Source: INE, Bank of Portugal, European Commission, OECD, ES Research

The average annual inflation rate rose from 2.4% in 2007 to 2.6% in 2008, although year-on-year price levels ended up with a positive variation of only 0.8%. The average annual unemployment rate declined from 8.0% in 2007 to 7.6% in 2008, reflecting the growth observed in the previous two years slightly above the potential. However, it is important to note that unemployment has already increased in the fourth quarter of 2008 in line with the stagnation of economic activity observed in the second half of the year.

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Tougher restrictions in the financial credit market contributed to a slowdown in the annual growth of loans granted to the private non-financial sector, which dropped from 9.9% in 2007 to a value close to 7.5% in 2008.

Brazil

At the end of 2007, the Brazilian economy was growing strongly and the trend continued in the first nine months of 2008 fuelled by internal demand, higher income and credit expansion. However, from October onwards, the uncertainty environment and confidence crisis led businesses and consumers to review their investment and consumption decisions, causing the economic activity to lose some momentum.

The Brazilian industry grew by 6.4% until September 2008 but declined in the fourth quarter, with GDP decreasing 1% after twelve consecutive quarters of growth. However, throughout the year GDP may still have grown very close to the 2007 average of 5.7%. Inflation also declined by the end of the year, going from a monthly average of 0.53% until August to 0.28% by December 2008.

This reversal of the macroeconomic scenario led the Brazilian central bank, during its meeting in October, to interrupt the trend of several increases of in the reference interest rate and to start discussing the possibility of reducing rates in December. The Selic rate ended 2008 at 13.75% (11.25% in December 2007) and the official inflation rate ended the year at 5.9%, above the target of 4.5% but still below the cap of 6.5%.

The Real/Euro exchange rate also showed high volatility during 2008, with an appreciation trend during most of the year, reaching a level of EUR/BRL 2.38 in August 2008. Subsequently, and following the deterioration of the international crisis, the Real/Euro exchange rate depreciated, ending the year at a rate of EUR/BRL 3.24.

Exchange rate EUR/BRL

Source: Bloomberg.

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African countries

The main African countries where PT is present showed a positive and strong economic performance in 2008.

In Angola, GDP grew by 16%, with the oil sector growing at an annual rate of 13%, while the non-oil sector grew at an annual rate of 19%. In fact, the Angolan economy is showing stronger signs of economic diversification reducing its dependence on oil exports. The country’s annual inflation rate was 12% and its currency, the Kwanza, kept its parity to the USD and, consequently, lost 7% against the Euro.

In Namibia, GDP showed an annual growth of 4% and the inflation rate was 9%. The Namibian Dollar (NAD), which is in parity system with the South African Rand, showed an average devaluation of 2530% against the Euro.

In Cape Verde, GDP grew by 6% and the inflation rate was also 6%. The exchange rate between the Cape Verde Escudo (CVE) and the Euro is fixed.

In Morocco, GDP grew by 7% and the inflation rate was 4%. The Moroccan Dirham (MAD) had an average devvaluation of 1% against the Euro.

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02 _ Regulatory background

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Within the context of the changes to the regulatory framework, special mention must be made for the spin-off of PT Multimédia, on 7th November, 2007, changing the competitive environment of the telecommunications market, as well as the Resolution of the Council of Ministers’ definition of the New Generation Networks as a strategic priority for the country. Territorial segmentation has also opened up new competitive possibilities for PT.

Domestic market

The spin-off of PT Multimedia, PT’s former cable business, which was concluded on 7 November 2007, changed the competitive landscape in the Portuguese telecommunications market. Following this event, I in 2008, several aspects of the regulatory environment were under discussion: the Regulatory Reform (a process not yet concluded), Next Generation Networks and Digital Terrestrial Television.

Next Generation Access Networks

On 18 June 2008, ICP-ANACOM launched a public consultation on the regulation of Next Generation Access Networks (NGA), which addressed several aspects, namely market and technological issues, the impact of NGA on existing networks, the development models, public policy aspects and regulatory models. As of 31 December 2008, ICP-ANACOM had not published both neither the requests and nor the results of the consultation, which has prevented a consistent definition of the regulatory framework for NGA.

On 30 July 2008, a Resolution of the Council of Ministers was published — Resolution No. 120/2008, which established NGA development as a strategic national priority as well as several objectives for 2010, aiming at having one million individual users, as well as several public services, connected to NGA. A set of legislative measures in respect of access to ducts and to the public domain, and in respect of in-building wiring were also addressed in the Council of Ministers Resolution which should be part of the final regulation.

On 18 September 2008, the European Commission launched a consultation on a draft Recommendation on the regulated access to NGA, under which the Commission intends to define general regulatory principles, as well as regulatory solutions for FTTH and FTTN, including the unbundling of fibre and bitstream solutions. The Commission is still working on the final version of the Recommendation.

Digital Terrestrial Television

In February 2008, the regulations for the tender procedures regarding the grant of rights of use of frequencies for the broadcasting of digital terrestrial television services and for the licensing of the distribution operator were published, one regarding Multiplex A, for the nationwide transmission, nationwide, of free-to-air television programmes, and the other regarding Multiplexers B to F, for the transmission of pay-TV television programmes, nationwide — Muxes B and C — and regional — Muxes D to F.

PT won the tender concerning Mux A: in December PT was awarded the granting title of to the relevant frequencies, which shall will allow the launch of Digital Terrestrial Television (DTT) in Portugal, and the switch-off of the analogue distribution signal, complying with the deadline set out by the European Commission (2012).

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In relation to the tender concerning Muxes B through F, PT has also won the tender, a decision that was judicially contested by the other competitor. As a result, the tender procedure is involved inprocess is the subject of litigation, which has led to the suspension of the awarding decision by ICP-ANACOM and ERC, the Portuguese media regulator.

Relevant markets 4 & 5

On 26 June 2008, ICP-ANACOM published a consultation on the wholesale market for (physical) network infrastructure access (including shared or fully unbundled access) at a fixed location (MR 4) and on the wholesale broadband access market (MR 5), having notified the European Commission of its final decision on 4 December 2008, according to which 184 central office areas were considered competitive, which correspond to circa 61% of broadband accesses, and in which PT will be unburdened of some of the obligations imposed by the NRA in 2005.

In those 184 areas, PT will not be subject to margin squeeze rules and to ex-ante control for of its broadband retail offers. Within one year, PT will no longer be forced to keep its bitstream wholesale offer in those areas.

However, PT shall will maintain its obligations relating to local loop unbundling and access to ducts. According to ICP-ANACOM, the aspects related to regulation of dark fibre offers and fibre access unbundling will be dealt with under a specific consultation process.

Universal service

In January 2008, ICP-ANACOM issued a final decision rejecting the estimates that PT Comunicações (“PTC”) had presented in October 2006 regarding the Net Costs of the Universal Service (“NCUS”) for 2003 as well as for 2001 and 2002 (both recalculated). ICP-ANACOM also announced that, within 90 days, it would launch a public consultation on a methodology to calculate the NCUS. This deadline expired in the middle of June with no further developments.

In February 2008, following a decision of the Portuguese Government, and notwithstanding that, under the Concession Agreement, PTC is the designated Universal Service Provider (“USP”) until 2025 and that the fundamental questions regarding the compensation for the NCUS remain open, ICP-ANACOM published a public consultation on the Universal Service aiming at preparing a tender for the designation of the USP in 2009.

In September 2008, the Regulator published the report on the Universal Service (“US”) Consultation and the Government made public its will to review or renegotiate with PTC the terms of the Concession Agreement (in order to be able to begin the tender procedure for the designation of the USP). PTC and the Government have already initiated conversations on this issue but a final agreement is yet to be reached.

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Compensation for the provision of public services

In November 2008, the Portuguese Government approved a Euro 1 million fund, inserted included in the State Budget for 2008, to be paid to PTC as compensation for the mandatory provision, pursuant to the Concession Agreement, of the following telecommunication services: Telex, Telegrams, Maritime Mobile and TV Broadcast.

Base price plan for the fixed telephony service

On 29 October 2008, ICP-ANACOM decided not to oppose the new fixed telephony base price plan for the residential market, which came into effect on 27 September, extending the period with for free unlimited on-net calls (week nights, from 21h to 09h) to weekend nights as well.

The nominal price variations, calculated for the basket of services considered by ICP-ANACOM for the control of the price-cap, were of -0.66%(instant variation) and -0.65% (annual average).

Wholesale market for voice call termination on individual mobile networks

On 2 July 2008, ICP-ANACOM approved a decision in respect of the specification of price control obligations within the wholesale market for voice call termination on individual mobile networks. Such decision imposed a decrease in mobile termination rates and introduced asymmetry on behalf of the third mobile operator.

This decision should have been effective as from 15 July 2008, but due to certain circumstances concerning its approval, it only became effective as from 23 August 2008.

The decision contains a new glide path, with an accentuated price decrease for the mobile termination rates of TMN ande Vodafone’s mobile termination rates, and grants Optimus a longer transition period for achieving such glide path (asymmetry), so that on of 1 October 2009, the price for voice call termination on mobile networks shall will be of Euro 0.066.50 cents per minute, for all three mobile operators.

Voice call origination on mobile networks

On 6 August 2008, three years after beginning (and not concluding) the analysis on Relevant Market 15, ICP-ANACOM published an “understanding”, in which it urged mobile operators to decrease their origination rates to a simular level as termination rates until by 30 September 2008, and, simultaneously to promote a reduction in the prices charged to other operators for billing and collection, under the threat of forwarding such matters to the Competition Authority or to address it within the scope of relevant market analysis.

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ICP-ANACOM’s understanding was issued after the publication of the European Commission’s new Recommendation on Relevant markets for purposes of ex-ante regulatory remedies, which no longer contains former Relevant Market 15.

Roaming regulation

Pursuant to Regulation 727/2007 on roaming rates within the EU, the European Commission has the responsiability to submit to the European Parliament a report on the functioning of that regulation, indicating if its objectives have been reached. For that effect, on 7 May 2008, the Commission launched a call for inputs, envisaging assessing the functioning and impact of the regulation on roaming rates within the EU, aiming, among others, at obtaining the opinion from all stakeholders as to the accomplishment of the Regulation’s main goals (reduction of roaming wholesale and retail charges) and impact in revenues and profits of operators.

The call for inputs also addressed the possible extension of the Regulation to roaming data communications, in particular SMS and MMS. The Commission also requested operators’ clarifications in respect of price differences between data services while on roaming as opposed to prices practiced in the domestic market.

According to statements issued on 15July 2008 15, the Commission intends to impose a reduction of roaming rates for data services, which may occur during 2009.

Spectrum — other aspects

ICP-ANACOM approved the new version of the National Frequency Allocation Plan 2009 — QNAF 2009.

A Regulation has been approved establishing the rules governing the identification and signalling of radiocommunication stations.

Granting of rights of use of frequency 3400-3800 MHz

After a public tender, ICP-ANACOM selected the entity which will present a proposal on the auction model for the awarding of the rights to use the frequency band of 3400-3800 MHz to operate BWA systems. The selected entity will also define the rules and the support system of the auction process.

Granting of rights of use of frequency 450MHz

On 22 August 2008, the regulation for the tender procedure regarding the grant of rights of use of frequency 450MHz for the provision of mobile services for all national territory was published. TMN and the other two mobile operators were prevented to from participatinge in this procedure, since, as was the case of other mobile operators, it has they have already been granted the right of use of frequencies for the provision of mobile telephone services.

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Granting of rights of use of frequency 2500-2690 MHz

On 11 December 2008, ICP-ANACOM approved the public consultation paper on rights of use in the frequency band 2500-2690 MHz (also known as the 2.6 GHz band).

Fees for radiofrequency usage

On 17 December 2008, Ordinance no. 1473/2008 was published, which changed the rules for the determination of the fee to be paid by mobile operators to ICP-ANACOM, for the usage of radiofrequencies.

Brazilian market

Main aspects during 2008

·                  ANATEL maintained its supervision actions, intensified by the implementation of the new Mobile Service Regulation and of the Decree-Law 6523/2008 (general rules on Customer Care services provided by telephone), on 13 February 2008 and 1 December 2008, respectively.

·                  ANATEL published Public Consultations and Resolutions, regarding the changing of the Regulatory framework, focusing on the increase of competition and consumer rights.

·                  New General Authorisations Plan, Decree-Law 6654/2008, allowing a telecommunications group to own several telephony companies in more than one region of Brazil.

·                  Portability process implemented last September 2008, allowing customers to keep their mobile number regardless of the mobile operator.

·                 During 2008, the free negotiation between mobile operators over the interconnection prices (VU-M) was kept and, consequently, the contracts signed previously were maintained. On July 2008, ANATEL approved new prices for local and long distance calls (VC-1, VC-2 and VC-3). Consequently, there has been an adjustment of VU-M prices for all the fixed-mobile calls, involving all the fixed and mobile operators.

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Main Public Consultations

·                  The Ministry of Communications (Administrative Rule 179/2008) has launched a public consultation with the objective of understanding citizens’ expectations on the future of the Brazilian communications sector, in order to help the Brazilian Government to improve its communication policy.

·                  On November 2008, ANATEL launched the Public Consultation 54/2008 regarding the primary allocation of the frequency band of 3.400 Mhz to 3.600 Mhz to be used in mobile services and additionally in multimedia communications and fixed telephony. The Consultation period ended at 5 January 2009.

·                  The period for contributions over to the Public Consultation 7/2008, concerning the assessment of efficient use of radiofrequency spectrum, ended on 6 May 2008.

ANATEL’s main resolutions

·                  Resolution 516, concerning the General Plan to Revise the Telecommunications Regulation in Brazil (PGR), establishes as short term initiatives: 1) revision of the quality service indicators, taking into account consumers perception,s about quality indicators; 2) implementation of a Mobile Virtual Network Operator regime, 3) allowance of restricted mobility for other telecommunications services,; 4) usage of new frequency bands, such as 450 MHz, 2.500 Mhz and 3.500 Mhz, including remains the remainders of SMP auctions, in order to expand broadband services, and 5) a study regarding the identification of Significant Market Power in mobile operators.

·                  On 29 April 2008, following the process 002/2007 — “3G”, Vivo signed the Terms of Radiofrequenciesy Authorisation. For band J (1.900 to 2.100 MHz), Vivo signed twenty such terms for the allocation of rights for a period of 15 years, extendable an unique timeonce for a new period of 15 years.

·                 On 30 June 2008, ANATEL published in the Diário Oficial da União (DOU) the Act 3832, deciding that mobile operators, using analogue base stations, must maintain these this equipments until the end of the Public Consultation 24/2008 or until a new date established in the meantimewhile by ANATEL.

·                  On 4 March 2008, the Council of Directors of ANATEL approved the authorisation to transfer of the control of Amazonia Celular to Vivo, as well as the subsequent authorisation to transfer of the control of Amazonia Celular to Oi (Telmar Norte Leste S.A.).

·                  On 30 April 2008, according to the Resolution 483/2008, all mobile operators presented the first version of the document on Cost Accounting Allocation and Separation (DSAC), known as the cost model.

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03 _ Strategic profile

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PT intends to consolidate its position as leader in the market segments where it is present. By entering the TV business, PT is reinventing its domestic residential business, taking full advantage of its unique capacity to offer integrated services. The extension of international operations and major investment in innovation consolidate PT’s competitive advantages.

Business environment

Telecommunications sector

Emerging markets as growth engine. In 2008 emerging markets contributed in an even more evident way towards the growth of the telecommunications revenue pool, representing over 67% of total growth, underpinned by high growth in subscribers.

Enhanced convergence trend. The availability of new access technologies and equipment with IP functionality has been driving an increasing convergence of contents and services across platforms. This trend has led to an increasing competitive pressure among telecommunications operators, IS/IT companies and content providers.

Telecommunications context in Portugal

Increasing competitive pressure. The telecommunications sector went through a major transformation in Portugal, with the consolidation of a new operator — Zon Multimedia — and increased commercial aggressiveness from Sonaecom and Vodafone.

Coordination between telecom operators and the Government regarding info-social inclusion. In 2008 there was a consolidation of a wide range of programmes, within the scope of the Technological Plan announced by the Portuguese Government in 2005, aimed at building the information society. The extension of the e-escolas programme, the projects implemented in the healthcare sector and the negotiation, in 2009, of a protocol for the development of the Next Generation Networks (“NGN”) are some of the examples that can be mentioned.

Strategy

Domestic leadership in all segments

Reinforce leadership in all market segments where PT operates. By entering the pay-TV business, PT is reinventing its domestic residential business, starting from an attacker position and, simultaneously, leveraging its position as a major integrated operator, aiming at offering broad and convergent products and services. In a converging world where individuals increasingly need to contact, communicate and consume seamless data services through all types of devices everywhere — at their workplace, at home or on the street —, PT’s unique skills and ability to offer integrated services are proving to be a true competitive advantage in Portugal.

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“To make the difference” in customer service. In a context of major market transformation and economic uncertainty, understanding customers’ needs throughout their life cycle and address these needs by ensuring world-class execution is a distinctive factor. This trust-based relationship makes possible to successfully encourage customers to adhere to increasingly complete product and service packages for longer periods.

International expansion

Maximise the strategic value of PT’s international assets, reinforcing the focus on Brazil and Africa. Given PT’s size, growth prospects and starting position, the Brazilian market remains a priority, representing already 46.3% of PT’s revenues in 2008. Africa will continue an important source of growth, where PT will reinforce partnerships and explore value-creating investment opportunities.

Focus on operational and commercial excellence in all assets, ensuring best practice sharing. By reinforcing operational and commercial excellence in all operations and promoting the sharing of best practices, PT will be able to fully tap the potential of each operation, taking into account the market development status in all segments (high or low income) as well as its competitive positioning.

Innovation

Competitive advantage of PT to become a “specialist operator”. PT aims to be an innovative operator, thus ensuring its own space in the global telecommunications sector. As such, PT concentrates its operation around distinctive skills, eliminating activities and operations where PT does not have this differentiating factor. PT believes that there are advantages in doing partnerships with local players in the markets where it operates. As a result, PT’s businesses will benefit from PT’s technological and business expertise, while leveraging on the local knowledge and relationships of its partners thus creating stronger and more agile local companies. A more detailed section on innovation, investigation and development is available in this report.

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Recent performance

Domestic operations

New operational and organisational structure. The operational integration of TMN with the wireline segment represents a milestone for the organisation, as well as a turning point in efficiency and effectiveness in the way that business areas operate. The new organisation is based on two principles:

·    Stronger customer focus, PT moved from a structure organised around fixed and mobile platforms to a structure centred on the specific needs of each segment, implementing a new organisation around five customer segments: Personal, Residential, SMEs, Corporate and Wholesale.

·    Superior operational efficiency, by eliminating several decision processes and layers, turning PT into a leaner and more agile company to effectively compete in an increasingly challenging environment.

Reversal of the historic trend in the wireline business. At the end of 2008, the wireline business registered a historical inflexion of customer loss, with a net increase of retail accesses. This movement resulted from PT’s entry in the pay-TV business with Meo — an innovative multiplatform offer (IPTV, satellite and mobile) — reaching an impressive success at a European level. In one year, Meo’s customer base increased 14.9 times, reaching over 310 thousand subscribers at the end of 2008 and an estimated market share of 14% of the pay-TV market in Portugal, already representing 42.9% of PT’s ADSL customers. Worth highlighting is the increase in ADSL in the second half of 2008, where PT recorded a number of net adds higher than the competition. Furthermore, by winning the bid for DTT broadcasting, PT increased its capacity to offer a unique multiplatform service at national level.

Strong growth in the mobile business. PT consolidated its leadership position (+10.9% annual growth in mobile customers) with stronger focus on the post-paid segment (+4.3pp of total customers in 2008 vs. 2007) and growth in mobile broadband revenues (data as a percentage of service revenues up by +4.3pp).

Leading-edge convergent products. In 2008, PT strategically captured the potential of fixed-mobile convergence opportunities. Targeting the SoHo and SMEs segment, PT launched the Office Box solution, a national and European reference in the provision of an integrated telecommunications service of fixed and mobile voice and data, software and hardware productivity tools and support to the corporate segment.

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International operations

The expansion of international operations to multiple geographies is one of the most important catalysts of value creation in the telecommunications sector over recent decades and PT is no exception. PT has been building a relevant portfolio of international operations which registered a 21% growth in 2008, increasing its importance for overall PT revenues by 5pp (50% of PT revenues in 2008).

Successful turnaround of Vivo. In 2008, a programme targeted at overcoming the challenges of a very competitive market was consolidated, with the objective of reinforcing customer focus and market leadership with the best network and customer service. Simultaneously, Vivo engaged in several projects to increase its productivity levels and integrate operationally all the previous operating companies. This repositioning allowed Vivo to reverse the historical trend of market share loss and, by increasing the gross addition rates and reducing churn, consolidate its position in the Brazilian market.

Increasing efficiency and productivity levels of international assets. The continuous focus on efficiency in international operations — and sharing of best practices — has allowed for a profitability increase in these operations in 2008.

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04 _ Innovation, research and development

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Competitiveness and differentiation in relation to business rivals involves investment in innovation, research and development. Within an increasingly competitive context, PT has invested 150 million Euros in this area, demonstrating that innovation is more than mere investment but more an integral part of the company’s DNA.

As already addressed in the strategic profile section, PT is fully aware that success lies in the constant search for innovation and differentiation opportunities, and has accordingly set forth a number of successful initiatives in the various businesses and markets where it operates. The present competitive landscape requires strong dynamics in order to ensure leadership. 2008 was a particularly interesting year at this level, with the various companies in the group significantly contributing to innovation through the increase in competitiveness and differentiation vis-à-vis the competition.

In 2008, PT invested more than Euro 150 million in innovation, research and development, which translates into more than 2% of total revenues.

Besides the investment in innovation in the development of new products and services, other areas were also considered, such as operational efficiency, customer care, development of new business models and the creation of a more efficient cultural organisation, thus broadening the scope of intervention and contributing to the expansion of PT’s competitive advantages.

Domestic operations

In the domestic operations, PT has been implementing various activities and projects.

Product and service development

Given the present competitive context, the main investments in innovation focused on the development of new products and services. These investments sought not only to attract new customers but also to retain the present customer base, reinforcing the functionalities and quality of the services rendered.

The main emphasis, in 2008, goes to investments in IPTV. The development of innovative services in the Meo service platform (Meo Sat, Catch-Up TV and Thematic Bundles) as well as the simplification of new customer provisioning via SMS contributed to the very positive growth of the customer base throughout 2008.

As regards to contents, the portfolio evolution of broadband products and services, both in fixed and mobile broadband access components, ensured differentiation from the competition. Examples of this are the Music Box and “Contacto Disponível” services.

Finally, the development of new segmented business offers, supported by technological and applicational converging solutions, enable the satisfaction of specific needs of different market sectors in an innovative way.

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Development of web solutions

Web solutions is a strategic area that has seen considerable technological and functional evolution in recent years, and therefore has been the target of particular attention in terms of innovation.

New added value functionalities were developed in the largest national portal, SAPO, and in mail and community service components (“Sapo Local” and “T2para3”), allowing PT to increase the levels of customer loyalty and service quality.

In what regards Web 2.0 functionalities, capitalising on the extensive user base and drawing on a crowdsourcing system, various differentiating functionalities were implemented with great impact in the experience of Internet service users.

Another aspect that needs to be underlined in the Web component is the development of new advertising functionalities in order to monetise the user base that resorts to the functionalities of the browser on a daily basis, seamlessly allowing the interaction between user and advertiser.

Operational efficiency

Throughout 2008, PT also committed to innovation in areas that have an impact in terms of operational efficiency.

On this front, the greatest emphasis goes to the redesign of the information systems, which supports the business restructuring made necessary by the fixed mobile convergence, combined with the pressing call for the continuous improvement of operations, with an impact in terms of processes and systems.

Bearing in mind the environmental impact generated by operational activities, PT sought new solutions for energy rationalisation. The selective use of voltaic panels, wind-powered generators, hydrogen fuelcells, and climatisation systems supported on solar cold, enabled greater cost containment and improved efficiency rates.

Lastly, and in a context where customers increasingly require autonomy in their decisions and self-management of their telecommunications service levels, PT invested significantly in components related to self-service and self-care, seeking to provide the final customer with higher service quality.

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Society and the environment

PT’s positioning has always been based on the core principles of growth and innovation, with the aim of improving the integration and prosperity of society.

Therefore, the social responsibility area takes on special relevance. In recent years, PT has invested consistently in projects in this field and 2008 was no exception. For the first time, the convergence between the mobile technologies and initiatives of a social nature has enabled PT to launch an innovative service — Kazoo, aimed at supporting non-profit charitable institutions.

From the perspective of contributing to the social and economic development, PT played an active role and developed several solutions in the context of the governmental initiative of the Information Society and the digitalisation of government services, namely:

·    Solutions for the Central Administration — namely, “Esquadra Século XXI” (21st Century Fleet) developed with the Ministry of Internal Administration and with the Police Force; the “Atendimento Temático da Deficiência” service (“Call Centre for Disability”) with the national Social Security Institute and the Information System for Public Buildings within the Portuguese General Directorate of Treasury and Finance.

·    “e-Escolas” and “e-Escolinhas” — integrated in a wider initiative supported by the Portuguese Government, with the aim of providing students, between the first grade and university, a laptop and internet access bundle.

·    Solutions for the healthcare industry — responding to one of the strategic objectives for the development of Portugal in the healthcare industry, specific services were developed to address the needs of this complex and demanding market.

International operations

In international operations, PT’s main commitments are related to the capitalisation of the know-how built upon the various operations, fostering the exchange of experiences and maximising success in new markets.

In this context, several initiatives were carried out aimed at attracting a client base in emerging markets, ensured by adapting the business offerings to the specific needs of the various local segments.

It is also important to underline innovative initiatives developed with the objective of increasing the range of services and functionalities for customers, both pre-paid and post-paid, and development of solutions to increase customer loyalty on the back of commercial advantages, as is the case with the Fusion Combo service in Namibia.

On the other hand, the use of new business channels allowed for greater market dynamics, not only by resorting to new web channels, but also by implementing new business models for attracting and retaining customers.

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All-in-one business solutions became specially relevant, focusing on a product service bundle approach with an associated monthly fee. These offers are supported by the migration of concepts from more mature markets, like the Office Box for the SME segment, incorporating local adaptations as required.

Research and development

PT believes that structured and continuous investment in research and development is crucial for the evolution and improvement of innovative products and technologies.

PT has invested in intellectual capital and in methodologies with the purpose of creating a culture of innovation and of ensuring new technological breakthroughs.

In this area, PT Inovação has played a fundamental role in the development of prototypes and business support solutions for the whole Group. In 2008, the following areas were explored:

·    Context Awareness services and applications to support future IP Multimedia environments;

·    Development of Content Delivery and Interactivity solutions for Mobile TV platforms;

·    Connected Home Systems and their integration with home electronic equipments;

·    Research and experimentation in Spatial Motion Recognition to support new forms of interaction with multimedia contents, in a physical, easy and immersive way;

·    Study and development of optical technology systems for the network, with a special focus on low-cost GPON solutions;

·    Research and trial of Digital Terrestrial Television — DTT solutions.

At the same time, and within the scope of the active involvement in the Carnegie Mellon University programme, PT sponsored the participation of several students in the Professional Master’s and Doctoral programmes. In addition, PT hired students that concluded the first edition of the programme, reinforcing its commitment to attracting young talent in the technological and innovation areas. In this context, applied research projects were developed in the following areas:

·    Operational Information Intelligence;

·    Design and optimisation of triple-play infrastructures for converged Networks;

·    Anti-phishing and cybersecurity;

·    Future Vision for Health Care — Next Generation Hospital;

·    Usability of the Web portal for the Meo service;

·    Geographic segmentation of next generation networks.

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05 _ Financial review

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The company’s international business now represents over half of its business volume.

Consolidated income statement

(1) Considering a Euro/Real average exchange rate of 2.6661 in 2007 and 2.6737 in 2008. (2) Wireline and domestic mobile operating revenues impacted by Euro 10.1 million and Euro 23.6 million respectively, in 2008 due to regulated declines in mobile termination rates (MTRs). (3) Commercial costs include costs of product sold, commissions (included in the profit and loss caption “Supplies and external expenses”) and marketing and publicity expenses. (4) EBITDA = income from operations + depreciation and amortisation. (5) EBITDA pre-PRBs = EBITDA + post retirement benefits. (6) Income from operations = income before financials and income taxes + curtailment costs + losses (gains) on disposal of fixed assets + other costs (gains).

Consolidated operating revenues

Consolidated operating revenues increased by 9.5% y.o.y in 2008, driven by growth at TMN and Vivo. TMN’s operating revenues increased by 3.8% y.o.y, underpinned by 683 thousand net additions in the year, equivalent to a 22.5% increase over 2007. Growth in customer revenues in 2008 was 2.9%, which represented another solid year of continued market outperformance. Vivo’s operating revenues increased by 23.4% y.o.y in Euros and by 23.8% y.o.y in Reais, underpinned by 7,475 thousand

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net additions, equivalent to a 34.2% increase y.o.y. Excluding the consolidation of Telemig, Vivo’s operating revenues would have increased by 13.6% y.o.y in Euros and by 13.9% y.o.y in Reais. Wireline operating revenues decreased in 2008 by 1.6% y.o.y but in 4Q08, revenues of the wireline segment increased by 2.0%, benefiting from the inflection of the performance in the retail segment and continued resilient performance of the business segments.

The success of PT’s pay-TV offer (“Meo”) is demonstrated by decelerating line loss and growth in the flat fee broadband subscriber base, as around 50% of IPTV gross additions were new customers to PT. Line loss trends have been improving markedly. While in 2007, 306 thousand lines were lost, in 2008 the number was 182 thousand and in 4Q08 line loss had reduced to 32 thousand. At the same time, PT has also seen an inflection in the trends of its flat fee broadband net additions that reached 35 thousand in 4Q08 compared to 96 thousand in 2008. As a result, PT reached 312 thousand pay-TV customers at the end of 2008 and the ADSL retail customer base increased by 11.5% y.o.y to 727 thousand customers. Pay-TV penetration of the ADSL customer base stood at 42.9% at the end of 2008.

In what concerns the financial performance of the domestic operations, lower mobile termination rates (MTRs) impacted negatively wireline and domestic mobile revenues by Euro 10.1 million and Euro 23.6 million respectively.

Other revenues, including intra-group eliminations, decreased by 10.3% y.o.y mainly due to: (1) lower revenues from the call centre and business process outsourcing (BPO) businesses in Portugal following the spin-off of PT Multimedia; (2) the termination of the management fee from Vivo, and (3) lower contribution to consolidated revenues from MTC as a result of the devaluation of the Namibian Dollar, which more than offset its growth in revenues of 12.0% y.o.y in local currency.

(1) Domestic operations include the wireline segment, TMN, PT Inovação, PT SI, PT Pro and PT Contact. (2) Considering a Euro/Real average exchange rate of 2.6661 in 2007 and 2.6737 in 2008. Includes mainly Vivo and Dedic. (3) Includes fully consolidated international assets, namely MTC, CVT, CST and Timor Telecom, and also the holding companies.

The contribution from fully and proportionally consolidated international assets to operating revenues increased to 49.6% in 2008. Brazil already accounts for 46.3% of consolidated operating revenues, an increase of 5.2pp from 2007.

Consolidated operating costs, excluding depreciation and amortization

Consolidated operating costs, excluding depreciation and amortization costs, increased by 13.2% y.o.y in 2008 to Euro 4,291 million, reflecting the impact of the consolidation of Telemig (Euro 189 million). Adjusting for this effect, consolidated operating costs would have increased by 8.2% y.o.y. in 2008 to Euro 4,102 million, primarily explained by the increase in operating costs at Vivo (Euro 150 million)

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due to increased commercial activity, and at the wireline business (Euro 135 million) reflecting mainly the increase in post retirement benefit costs, as explained in more detail below.

Wages and salaries _ Wages and salaries decreased by 3.4% y.o.y. in 2008 to Euro 617 million, primarily as a result of the reduction in the Wireline business (Euro 26 million) related to the redundancy programmes carried out in 2007 and 2008 and also on management’s focus on containing wage increases. This effect was partially offset by an increase at Vivo (Euro 15 million) due to the impact of the consolidation of Telemig (Euro 19 million). Wages and salaries accounted for 9.2% of consolidated operating revenues.

Post retirement benefit costs _ Post retirement benefit (PRB) costs amounted to Euro 45 million in 2008, as compared to a negative cost of Euro 65 million in the same period of last year. In 2007, this item included the recognition of prior year service gains of Euro 110 million related to changes in benefits of pension plans, which led to a reduction in the pension benefits obligations. Excluding this effect, post retirement benefit costs would have remained broadly flat at Euro 45 million, with the reduction in the expected return on assets (Euro 7 million), following the decrease in fund assets over the last year, being offset by the reduction in service cost (Euro 8 million), due to the amendments made at the end of 2007 to benefits granted under the pension plans and also the above mentioned redundancies.

Direct costs _ Direct costs increased by 19.8% y.o.y to Euro 1,087 million in 2008 and accounted for 16.1% of consolidated operating revenues. This increase is primarily explained by Vivo and the wireline business. Direct costs at Vivo increased by 32.2% y.o.y (Euro 138 million), reflecting the impact of the consolidation of Telemig (Euro 54 million). Excluding this effect, Vivo’s direct costs would have grown by 19.5% y.o.y due to the increase in interconnection costs related to the growth in M2M traffic in line with the increase in Vivo’s average customer base. At the wireline business, direct costs increased by 10.4% (Euro 37 million), primarily as a result of programming costs related to the roll-out of the pay-TV service.

Commercial costs _ Commercial costs increased by 15.5% y.o.y to Euro 1,233 million and accounted for 18.3% of consolidated operating revenues. This increase is primarily explained by Vivo whose commercial costs grew by 19.9% y.o.y (Euro 132 million), reflecting higher commercial activity, including the rollout of GSM. The growth at Vivo is also explained by the impact of the consolidation of Telemig (Euro 66 million). Commercial costs also increased in the domestic operations (Euro 27 million) due to higher commercial activity at the wireline business, in connection with the roll-out of the pay-TV service, and at TMN due to the continued increase in the subscriber base.

Other operating costs _ Other operating costs, which mainly include support services, supplies and external services, indirect taxes and provisions, increased by 5.3% y.o.y to Euro 1,310 million in 2008, mainly due to the increase at Vivo (Euro 54 million) related to the consolidation of Telemig (Euro 50 million), and also increased commercial activity and higher support services and spectrum fees due to the increase in the subscriber base. In the domestic operations, other operating costs remained broadly stable with the increase in customer care and support costs due to

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the strong take up of wireless broadband and pay-TV being offset by a reduction in supplies and external expenses in connection with a strong focus on cost control. This cost item accounted for 19.5% of consolidated operating revenues.

EBITDA

EBITDA pre PRBs (excluding post retirement benefits) increased by 8.6% y.o.y, equivalent to a margin of 36.9%. Reported EBITDA increased by 3.7% y.o.y in 2008 to Euro 2,443 million, equivalent to a margin of 36.3%. Excluding the effect of Telemig, PT consolidated EBITDA pre-PRBs would have increased by 6.2% y.o.y. EBITDA improvement in the period was underpinned by growth at TMN and Vivo.

(1) Considering a Euro/Real average exchange rate of 2.6661 in 2007 and 2.6737 in 2008. (2) EBITDA = income from operations + depreciation and amortisation. (3) EBITDA pre-PRBs = EBITDA + post retirement benefits. (4) Domestic operations include the wireline segment, TMN, PT Inovação, PT SI, PT Pro and PT Contact. (5) Includes mainly Vivo and Dedic. (6) Includes only fully consolidated international assets, namely MTC, CVT, CST and Timor Telecom, and also the holding companies.

Wireline EBITDA, excluding PRBs, which include prior year service gains of Euro 110 million in 2007, amounted to Euro 887 million. EBITDA pre-PRBs of the wire line segment declined by 6.0%, mainly as a result of higher programming costs related to PT’s pay-TV offer, higher commercial costs due to intense commercial activity and higher customer care and support service costs.

TMN’s EBITDA in 2008 increased by 1.5% y.o.y driven by customer and revenue growth. TMN’s EBITDA performance was achieved against a backdrop of intense commercial activity (22.5% increase in net additions in 2008) and higher customer care and support costs, as a result of increased penetration of data services and lower mobile termination rates (“MTRs”), which had a negative impact of Euro 13 million in 2H08. EBITDA margin of TMN stood at 43.0% in 2008. Excluding the negative impact of declining MTRs, TMN’s EBITDA would have increased by 3.4% in 2008.

Vivo’s EBITDA increased by 39.9% y.o.y, equivalent to 40.3% y.o.y in local currency, on the back of the strong increase in revenues and consolidation of Telemig, as referred to previously. Excluding the effect of Telemig, Vivo’s EBITDA would have increased by 30.8%, equivalent to 31.2% y.o.y in local currency. Vivo’s EBITDA margin

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reached 27.4% in 2008, an improvement of 3.2pp versus 2007. In 4Q08, Vivo posted a 5.9pp improvement in EBITDA margin which reached 30.1%.

Other EBITDA increased by 6.5% y.o.y to Euro 79 million in 2008, mainly as a result of the increased contribution of the international assets, notwithstanding a lower contribution from MTC due to the devaluation of the Namibian Dollar and the termination of Vivo’s management fee as from August 2008.

Fully and proportionally consolidated international assets contributed 39.3% of PT’s consolidated EBITDA in 2008, an increase from 30.6% in 2007. Brazilian businesses accounted for 34.5% of EBITDA in 2008, which compares to 25.6% in 2007. The EBITDA performance of the fully consolidated African assets in 2008 accounted for 4.2% of consolidated EBITDA.

Net income

Depreciation and amortisation _ Depreciation and amortisation costs increased by 12.9% y.o.y in 2008 to Euro 1,268 million, reflecting higher contributions from: (1) Vivo, which accounts for 67% of the increase in D&A, as a result of the acquisition and consolidation of Telemig and higher depreciation rates for the TDMA and CDMA networks, following the GSM network rollout, and (2) TMN and wireline business in Portugal, as a result of increased D&A resulting from the commitments towards the information society projects and investments in the rollout of Pay-TV, and also from the revaluation of ducts and certain real estate assets undertaken in 2008 (Euro 20 million in 2H08). Excluding Telemig, D&A would have increased by 7.2% y.o.y.

Curtailment costs, net _ Curtailment costs amounted to Euro 100 million in 2008 related to the reduction of 357 employees. In 2007, curtailment costs amounted to Euro 276 million, which included a cost of Euro 289 million related to the reduction of 1,004 employees and a gain of Euro 14 million related to the settlement of benefits.

Net gains on disposal of fixed assets _ Net gains on disposal of fixed assets amounted to Euro 19 million in 2008, as compared to Euro 3 million last year, mainly due to higher real estate asset disposals. The disposal of fixed assets generated a cash inflow of Euro 23 million in 2008 and 11 million in 2007.

Net interest expenses _ Net interest expenses increased by 38.0% to Euro 272 million primarily due to the increase in PT’s average net debt in the period. This increase in interest expenses was partially offset by lower average cost of debt in Brazil. Consolidated average cost of debt of PT was 5.0% in 2008. Excluding Brazil, the average cost of debt was 4.3% in 2008.

Equity in earnings of associated companies, net _ Equity in earnings of affiliates in 2008 amounted to Euro 171 million, as compared to Euro 126 million in 2007. This caption includes PT’s share in the earnings of: (1) Unitel: Euro 123 million in 2008 compared to Euro 92 million in 2007; (2) Médi Télécom: Euro 12 million in 2008 compared to Euro 3 million in 2007; (3) CTM: Euro 17 million in 2008 and 2007, and (4) UOL: Euro 11 million in 2008 compared to Euro 13 million in 2007. In 2008, this

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caption also included a Euro 9 million gain resulting from the sale of the 34% stake in Banco BEST.

Net other financial losses (gains) _ Net other financial losses, which include net foreign currency losses, net gains on financial assets and net other financial expenses, amounted to Euro 28 million in 2008, as compared to net gains of Euro 188 million in 2007. Net foreign currency losses amounted to Euro 9 million in 2008, as compared to Euro 12 million in 2007. Net gains on financial assets amounted to Euro 19 million in 2008, as compared to Euro 249 million in 2007, and primarily include: (1) the change in fair value of free-standing cross currency derivative instruments, which resulted in gains of Euro 10 million in 2008, primarily explained by the appreciation of the US Dollar against both the Euro and the Real, compared to net losses of Euro 10 million in 2007; (2) the gains obtained from the disposal of stakes in the share capital of Africatel, 3% stake in 2008, with gains of Euro 9 million, and 22% stake in 2007, with gains of Euro 111 million; (3) the change in the fair value of equity swap contracts on PTM shares which resulted in a gain of Euro 77 million in 2007; (4) the disposal of the investment in shares of Banco Espírito Santo in 2007, which resulted in a gain of Euro 36 million, and (5) the financial settlement of PT equity swap contracts in 2007 which resulted in gains of Euro 32 million. Net other financial expenses, which include banking services, commissions, financial discounts and other financing costs, amounted to Euro 39 million in 2008, compared to Euro 48 million in 2007.

Provision for income taxes _ Provision for income taxes, decreased from Euro 243 million in 2007 to Euro 233 million in 2008 corresponding to an effective tax rate of 25.0% in 2008, as compared to 23.6% in 2007. The increase in the effective tax rate is primarily explained by higher non-taxable capital gains on the disposal of investments in 2007, which acounted for Euro 147 million as compared to Euro 18 million booked in 2008. Adjusting for this effect, the effective tax rate would have been 25.4% in 2008, as compared to 27.3% in 2007.

Minority interests _ Income attributable to minority interests, increased to Euro 120 million in 2008, as compared to Euro 93 million in 2007, which included Euro 29 million attributable to minority interests of PT Multimedia. The increase in this caption is primarily attributable to: (1) Vivo, which booked Euro 52 million in 2008 compared to Euro 15 million in 2007, as a result of the acquisition of Telemig and improvement in Vivo’s net income, and (2) Africatel, which booked Euro 24 million in 2008 compared to Euro 10 million in 2007, following the sale of a 22% stake in August 2007 and a 3% stake in September 2008 and higher net income generated by its subsidiaries.

Net income _ Net income decreased by 21.6% y.o.y in 2008 to Euro 582 million, primarily as a result of: (1) the increase in post retirement benefits, following the prior year services gains recorded in 2007, (2) higher net interest expenses in 2008 related to the increase in the average net debt, and (3) higher net other financial gains in 2007 related to the disposal of certain investments. These effects were partially offset by the growth in EBITDA pre-PRBs.

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The increase in total capex is mainly reflected in the investment made in new generation technology and client-associated investment.

Capex

(1) Considering a Euro/Real average exchange rate of 2.6661 in 2007 and 2.6737 in 2008. Capex in 2008 excludes the acquisition of 3G licenses in Brazil (Euro 227 million). (2) In 2007, capex excludes Euro 242 million related to additional commitments under the terms of the UMTS license.

Total capex increased by 38.1% in 2008 to Euro 1,242 million, equivalent to 18.4% of revenues. Excluding the consolidation of Telemig, capex would have increased by 32.4%. Wireline capex increased by 37.9% y.o.y to Euro 403 million, primarily as a result of: (1) investments in network upgrades for all IP transformation, to provide increased bandwidth, in great part related to the launch of IPTV services, and (2) a surge in pay-TV net additions and resulting increased investment in set-top boxes during this period. TMN’s capex increased by 33.8% y.o.y to Euro 245 million in 2008, driven by the continued deployment of 3G/3.5G networks, both in terms of capacity and coverage, aimed at offering the best mobile voice and data services in Portugal.

Capex at Vivo increased by 41.8% y.o.y to Euro 510 million in 2008 and was directed towards increasing network coverage and capacity, including the Northeast states where Vivo launched the service in October, and building capacity, namely in GSM/EDGE and 3G. The GSM/EDGE network already has nationwide coverage, while the 3G network covers 3,000 cities. Excluding the consolidation of Telemig (Euro 61 million), capex at Vivo would have increased by 27.6% y.o.y. In 2008, other capex increased to Euro 85 million, compared to Euro 64 million in 2007, primarily due to the increase in capex in the call centre operations in Brazil, which was partially offset by lower capex at MTC due to the impact of the depreciation of the Namibian Dollar.

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Cash flow

Operating cash flow _ Operating cash flow amounted to Euro 1,374 million in 2008, a decrease of only 4.1% in relation to the previous year, notwithstanding the increase of over 38% in capex. In effect, the reduction in EBITDA pre-PRBs minus Capex from Euro 1,392 million in 2007 to Euro 1,245 million in 2008, as a result of the 38.1% increase in capex, was partially offset by the improvement in the investment in working capital, which declined from a net investment of Euro 87 million in 2007 to a net divestment of Euro 4 million in 2008, on the back of the positive performance of working capital management in the domestic operations.

(1) In 2008, capex excludes the acquisition of 3G licenses in Brazil (Euro 227 million). In 2007, capex excludes Euro 242 million related to additional commitments under the terms of the UMTS license. (2) In 2008 and in 2007, this caption includes Euro 21 million and Euro 87 million respectively, related to the reimbursement of healthcare expenses.

Free cash flow _ Free cash flow performance reflects the non-recurrent investments made in 2008 in the amount of Euro 517 million, related to the acquisition of the controlling stake in Telemig and the subsequent voluntary and mandatory tender offers. In 2007, free cash flow performance was also impacted positively by the disposal of financial investments and cash settlement of certain derivatives that resulted in a cash inflow of Euro 333 million. Dividends received declined from Euro 149 million in 2007 to Euro 80 million in 2008, as this caption in 2007 included dividends from PT Multimedia, related to fiscal year 2006, and also dividends from Unitel, in respect of fiscal year 2005.

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The consolidated balance sheet reflects a shareholder remuneration strategy.

Consolidated balance sheet

(1) Considering a Euro/Real exchange rate of 2.5963 at year-end 2007 and 3.2436 at year-end 2008. (2) This caption includes Euro 61 million related to dividends received from Unitel, which in the consolidated financial statements is included under accounts receivable. (3) As at 31 December 2008, this item includes Euro 25.4 million related to prior years service gains on unvested rights not yet recognized (Euro 25.9 million as at 31 December 2007). (4) The increase in this caption in 2008 is due primarily to the impact of the acquisition of Telemig.

The net exposure to Brazil _ As at 31 December 2008, the net exposure (assets minus liabilities) to Brazil amounted to R$ 7,657 million (Euro 2,361 million at the Euro/ Real exchange rate as at 31 December 2008). The assets denominated in Brazilian Reais in the balance sheet as at 31 December 2008 amounted to Euro 5,453 million, equivalent to 39.8% of total assets.

The increase in intangible and tangible assets in 2008 is explained by: (1) the assets recorded as a result of the acquisition of Telemig amounting to Euro 785 million; (2) the acquisition of 3G licenses at Vivo amounting to Euro 227 million; (3) the revaluation of PT’s ducts infrastructure, amounting to Euro 867 million, and (4) the revaluation of real estate assets, amounting to Euro 208 million. These effects were partially offset by the impact of the depreciation of the Real against the Euro from 2.5963 as at 31 December 2007 to 3.2436 as at 31 December 2008, which led to a reduction in total assets of approximately Euro 1,360 million.

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The increase in total liabilities is primarily explained by the increases in the accrued post retirement liability and gross debt, as discussed below, and in deferred tax liabilities. The increase in deferred tax liabilities is mainly related to the tax effects recognised in the balance sheet resulting from: (1) the asset revaluations mentioned above (Euro 284 million), and (2) the assets recorded in accordance with the purchase price allocation of Telemig (Euro 105 million). In 2008, total liabilities were also impacted by the depreciation of the Real against the Euro, which led to a reduction in total liabilities of Euro 565 million.

Consolidated net debt

Net debt _Consolidated net debt amounted to Euro 5,571 million as at 31 December 2008, compared to Euro 4,382 million as at 31 December 2007. The 50% share of Vivo’s net debt, proportionally consolidated by PT, amounted to Euro 655 million as at 31 December 2008. The increase in net debt in the year is primarily explained by the: (1) acquisition of the 3G licenses in Brazil amounting to Euro 227 million; (2) investment in the acquisition of Telemig amounting to Euro 517 million less the Euro 129 million of cash balance of Telemig at the time of the of acquisition; (3) share buyback amounting to Euro 905 million, and (4) dividends paid by PT in the amount of Euro 533 million.

Total debt _ As at 31 December 2008, total consolidated gross debt amounted to Euro 6,696 million, of which 66.3% was medium and long-term and 60.7% was set at fixed rates. As at 31 December 2008, 83.5% of total debt was denominated in Euros and 16.5% in Brazilian Reais. Vivo’s debt is either Real-denominated or has been hedged into Reais.

(1) In 2008, PT contracted equity swaps over 114.7 million own shares under its share buyback programme. (2) This caption includes dividends paid by consolidated subsidiaries to minority shareholders.

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The amount of cash available excluding international operations plus the undrawn amount of PT’s committed commercial paper lines and standby facilities totalled Euro 2,180 million at the end of December 2008, of which Euro 1,600 million was undrawn committed commercial paper and standby facilities.

In 2008, PT’s average cost of debt and maturity was 5.0% and 4.9 years respectively. Excluding Brazil, PT’s average cost of debt was 4.3% in 2008, with a maturity of 4.8 years as at 31 December 2008. In 2008, the net debt to EBITDA ratio was 2.3x (1.9x in 2007) and EBITDA cover stood at 9.0x (11.9x in 2007).

Post retirement benefits

PBO _ As at 31 December 2008, the projected benefit obligations (PBO) of PT’s post retirement benefits related to pensions and healthcare amounted to Euro 3,034 million. The market value of assets amounted to Euro 2,132 million. In addition, PT has liabilities with salaries to suspended and pre-retired employees amounting to Euro 908 million, which are not subject to any legal funding requirement and therefore monthly salaries are paid directly by PT to the beneficiaries until the retirement age. Therefore, gross unfunded obligations amounted to Euro 1,810 million. PT’s post retirement benefits plans for pensions and healthcare are closed to new participants.

The PBO was computed based on actuarial assumptions consistent to the demographic and financial information of our plans and in line with IAS 19 requirements. Following the changes in financial markets and economic trends that occurred in 2008, the discount rate for pensions, pension supplements and healthcare liabilities was adjusted from 5.25% as at the end of 2007 to 5.75% as at the end of 2008, in line with the increase in corporate bond spreads, while the discount rate for salaries was adjusted from 4.75% to 5.75% and the inflation assumption was adjusted from 2.00% to 1.75%. Based on the demographic information as of 31 December 2008, mortality tables were also adjusted for an additional year.

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(1) The decline in the market value of funds resulted from the payment of pensions and supplements of Euro 164 million, payment of health care expenses of Euro 21 million and the negative return of assets under management of Euro 628 million (equivalent to-23%), partially offset by the contributions made by PT totalling Euro 38 million and by beneficiaries totalling Euro 8 million.

Total unfunded obligation _ Total unfunded obligation increased by Euro 506 million in 2008 to Euro 1,810 million, as a result of: (1) net actuarial losses of Euro 595 million; (2) curtailment costs of Euro 101 million related to the reduction of 357 employees, and (3) PRB costs amounting to Euro 47 million. These effects were partially offset by payments and contributions of Euro 234 million made in the year, including a contribution in kind of real estate assets totalling Euro 37 million.

(1) In 2008 and 2007, the PRB cost recorded in the income statement included a gain of Euro 2 million related to the amortisation of prior years service gains of unvested rights. (2) In 2008, the curtailment cost recorded in the income statement amounted to Euro 100 million and includes a gain of Euro 0.5 million related to the extraordinary recognition of deferred prior service gains. In 2007 curtailment cost recorded in the income statement amounted to Euro 276 million, and excludes Euro 15 million related to the spin-off of PTM which were recorded under “discontinued operations” and includes a gain of Euro 2 million related to the extraordinary recognition of deferred prior year service gains. (3) In 2008, this caption includes: (i) payments of salaries to pre-retired and suspended employees amounting to Euro 188 million; (ii) termination payments, under the workforce reduction programme, amounting to Euro 5 million; (iii) net payment of healthcare expenses amounting to Euro 3 million, and (iv) contributions to the pension funds of Euro 38 million. (4) In 2008, this caption includes: (i) a gain of Euro 232 million related to the changes in actuarial assumptions; (ii) a loss of Euro 800 million related to the difference between actual return on assets (-23%) and expected return on assets (6%), and (iii) a net loss of Euro 27 million related to differences between actuarial assumptions on PBO and actual data.

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(1) In 2007, this item was related to certain changes in the Social Security rules (DL 187/2007) and to the formula used by PT to calculate pension supplements.

Shareholders’ equity (excluding minority interests)

Shareholders’ equity _ As at 31 December 2008, shareholders’ equity excluding minority interests amounted to Euro 236 million, which represents a decrease of Euro 1,103 million in 2008. This decrease is explained by: (1) the equity swaps contracted over PT’s own shares in 2008 amounting to Euro 905 million; (2) the dividends paid to shareholders amounting to Euro 533 million; (3) the negative currency translation adjustments amounting to Euro 595 million, mainly related to the depreciation of the Euro/Real exchange rate, which decreased to 3.2436 at the end of December 2008; (4) the net actuarial losses related to post retirement benefits amounting to Euro 437 million (net of taxes); (5) the revaluation of PT’s ducts infrastructure in the amount of Euro 638 million (net of taxes); (6) the revaluation of certain real estate assets in the amount of Euro 153 million (net of taxes), and (7) the Euro 582 million net income generated in the period.

(1) This item is primarily related to the depreciation of the Real against the Euro. (2) Dividends paid on 24 April 2008. (3) In 2008, PT contracted equity swaps over 114.7 million own shares under its share buyback programme, of which 68.6 million own shares were physically settled on 20 March 2008 and 46.1 million own shares were physically settled on 10 December 2008.

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Distributable reserves _ Pursuant to Portuguese legislation, the amount of distributable reserves is determined according to the standalone financial statements of the Company prepared in accordance with Portuguese GAAP. Distributable reserves decreased by Euro 1,089 million to Euro 768 million as at 31 December 2008, as the Euro 489 million net income generated in 2008 under Portuguese GAAP was more than offset by: (1) the acquisition of Euro 1,050 million in treasury shares, of which Euro 914 million relate to the 114.7 million shares contracted in 2008 and Euro 136 million relate to the 14.6 million shares contracted during 2007, and (2) dividends distributed in the amount of Euro 533 million, following the approval at the AGM of 28 March 2008.