PORTUGAL TELECOM, SGPS, S.A.
Public Company
Registered Office: Av. Fontes Pereira de Melo, no. 40, Lisboa
Legal Entity: 503 215 058
Share Capital: 1,128,856,500 Euros
Registered with: Lisbon Commercial Registry Office
under no. 3602/940706
Letter to the shareholders of Portugal Telecom
				6 March 2006

Sonaecom-SGPS, S.A. and Sonaecom, B.V. (hereinafter named jointly as ‘‘Sonaecom’’) preliminarily announced an unsolicited cash offer (the ‘‘Offer’’) for Portugal Telecom, SGPS, S.A. (‘‘PT’’ or the ‘‘Company’’), on 6 February 2006. The Board of Directors (the ‘‘Board’’) having carefully reviewed the draft offer announcement and the draft prospectus provided by Sonaecom on 27 February 2006 (the ‘‘Offer Documents’’), believes that the Offer significantly undervalues the Company and is, therefore, not in the best interest of PT’s shareholders. Accordingly, this letter and the accompanying presentation provide the basis on which the Board recommends the shareholders to reject the Offer.

WHY YOU SHOULD REJECT THE OFFER

Sonaecom’s Offer Significantly Undervalues PT

Sonaecom’s Offer significantly understates the full value of PT and Sonaecom’s arguments on value are disingenuous. This is demonstrated by the following valuation methodologies:

The Offer price of A9.50 represents only a 16% premium to PT’s pre-announcement closing price. The Offer price further reflects (assuming the removal of the restrictions in the by-laws) a modest 5% premium to PT’s share price four weeks prior to the Offer when France Telecom’s profit warning caused the share prices of Europe’s publicly traded telecommunications companies to fall sharply.

The premium implied by the Offer is less than one half of levels achieved in: (i) precedent comparable public takeovers in the European telecommunications sector; (ii) large unsolicited transactions in the broader European market; and (iii) substantial unsolicited transactions in Portugal. The modest premium represented by the Offer relative to precedent premia results in an undervaluation of PT of up to A2.6 billion. This is value Sonaecom wants to take from PT’s owners.

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Sonaecom’s Offer values PT at 6.3x 2005 EBITDA, which represents a significant discount to valuations achieved in other change of control transactions which have occurred recently in the European telecommunications sector.

PT’s Cash Flow Belongs to You. Why Should You Finance Sonaecom’s Offer?

Sonaecom’s Offer will borrow heavily off PT’s balance sheet to finance a A16.3 billion (including PT’s net debt) Offer for PT’s assets. Sonaecom has stated that it will undertake a rights issue of up to A1.5 billion to fund the Offer. How will the remaining A14.8 billion—or more than 90% of the transaction value—be funded? By mortgaging PT’s assets and cash flows? This cash flow belongs to the PT shareholders, and by accepting the Offer you would be giving away value that can be realised by PT independently with lower execution risk.

Sonaecom B.V., the vehicle that Sonaecom proposes to acquire PT, has a share capital of A100,000 and will be highly levered with significant financing requirements (in particular a need to repay 50% of the Offer’s financing at the end of the second year following a transaction) which endanger the Company’s future ability to: (i) invest in the growth of its business; (ii) undertake capital expenditures relating to the modernisation of the Portuguese information society (e.g. broadband, 3G, digitalisation of pay-TV offering, etc.); (iii) continue to proactively fund its pension fund obligations; and (iv) maintain attractive and competitive tariffs going forward to benefit consumers. The Offer’s minimum acceptance condition of 50.01% may be a further indication that Sonaecom is seeking to gain control of PT for a modest cash outlay, thereby reflecting the significant financial constraints Sonaecom faces going forward.

Sonaecom’s Offer is Conditional on Regulatory Approval of Unprecedented Concentration

The Board has received legal opinions indicating that the regulator may be unable to approve Sonaecom’s proposed transaction given that the Offer is predicated on permitting an unprecedented level of market concentration.

Wireless Concentration is Untenable for a Coherent Regulatory Policy

Sonaecom’s management has publicly announced that the value creation opportunity contemplated by the Offer is based upon merging Sonaecom’s Optimus and PT’s TMN mobile operations. The combination of Optimus and TMN would create a very large wireless operator in a duopolistic market with an estimated pro forma subscriber market share of over 65%.

A TMN-Optimus combination would result in unprecedented levels of wireless market concentration. We do not believe that such a combination, when compared to other European precedent in-market mobile consolidation transactions, would satisfy the minimum conditions for a competitive mobile market:

Impact of Transactions After Consolidation

Having reviewed previous European wireless in-country consolidation transactions, we believe that the likelihood of such a transaction being approved is low and implies significant risks to the credibility of the Offer.

The Resulting Concentration is Also Unprecedented From a Combined Voice Market Share Perspective

The Portuguese voice market is split between mobile (58% of total) and fixed line (42%) services, with PT holding the leading position in both segments. As Sonaecom also has a relevant position in both the mobile and fixed line voice markets, the combination of PT and Sonaecom would produce a pro forma market

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share of 77% of the Portuguese voice market. This transaction would ultimately leave Vodafone, which offers only mobile services, as the only substantial competitor to a combined Sonaecom-PT in the carriage of voice minutes.

In conclusion, we believe that despite Sonaecom’s stated intention to divest one of the fixed networks that would be combined as a result of the transaction, the regulatory hurdles are such that an approval would be without precedent. This conclusion is particularly apparent given the fact that the regulator (according to Portuguese competition law) needs to look at each market segment individually (fixed and mobile) when ruling on the transaction.

While the cost (as measured by household bills in Portugal) of most basic services such as water, electricity, gas, transportation, food and healthcare has increased meaningfully over the past five years, PT has actually driven down the cost of telecommunication services in Portugal as a result of our initiatives to provide services at attractive and competitive prices. Concerns about whether such a substantial concentration in the telecommunications sector could jeopardise consumer gains are naturally a consideration that will need to be taken into account by the regulator.

WHY YOU SHOULD REMAIN WITH PT

PT Has Been a Substantial Contributor to the Development of Portuguese Society

PT has an extensive history of developing innovative products and services which have made telecommunication services more accessible to Portuguese consumers, including: (i) being the first prepaid mobile operator in Europe; (ii) introducing the low-cost UZO mobile brand; (iii) establishing flat-rate voice pricing plans; and (iv) current initiatives to offer VoIP and HDTV services.

Consumers in the Portuguese market further enjoy attractive pricing relative to others in Europe for leading telecommunication services, such as broadband, pay-TV and mobile services, which has resulted in above-European average penetration levels in each of those areas.

At the same time, PT has been a positive contributor to the establishment of a fully competitive environment in Portugal, by offering lower-than-average European wholesale prices for ULL services and leased lines, thereby facilitating an attractive market opportunity for new entrants.

However, Sonaecom has failed to take advantage of this opportunity, having achieved inferior results to date in mobile services compared to other European third entrants and having failed to establish a position as the #1 alternative operator in Portugal in any of the fixed line market segments: direct access, indirect access and broadband. How Sonaecom will reverse its history of underperformance in telecommunications as a result of an acquisition of PT has not been made clear to date since Sonaecom has not disclosed its strategy for a combined PT-Sonaecom and has never previously managed an operation of PT’s magnitude. Similarly, Sonaecom has not disclosed key information regarding its plans for PT in terms of transaction financing, future investments, asset disposals and international partnerships. It is also unclear to what extent France Telecom will be a key driver of a pro-forma PT-Sonaecom strategy going forward. Finally, Sonaecom’s Offer is conditioned on the removal of the restrictions in the by-laws and, consequently, it will be important to understand if Sonaecom expects preferential treatment in relation to these restrictions.

PT Has a Strong Track Record of Operational and Financial Performance . . .

PT has demonstrated outstanding operational and financial performance over the last five years, while also playing a key role in promoting innovation, launching technologically advanced products and services, and developing the Portuguese debt and equity markets.

PT’s historical track record speaks for itself. PT has consistently delivered strong cash flow growth, achieving a 17% total increase over the 2001-2005 period in EBITDA and a 92% expansion in operating cash flow. PT has just released its 2005 results, which again confirmed its execution ability in challenging market conditions.

. . . And Has Built a Solid Portfolio of International Assets

PT has historically sought to leverage its proven operating capabilities and natural advantages by expanding its footprint internationally in search of enhanced growth and value creation opportunities. As a result, PT has succeeded in establishing a portfolio of high quality international investments in a variety of markets that we believe feature superior growth potential to the Portuguese telecom sector. This portfolio of international assets today represents significant value for PT and offers significant potential to create

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shareholder value. PT has previously demonstrated its commitment to monetise its international investments appropriately through sales of Mascom, Primseys and UOL (stake monetised in IPO).

PT Has Delivered Attractive Shareholder Value So Far . . .

PT’s strong operational performance and financial flexibility has been reflected in its share price appreciation and has allowed the Company to deliver significant amounts of cash to its shareholders via highly attractive dividend and share buyback policies, while continuing to invest in its core businesses in Portugal and abroad.

Even without taking into account the impact of the Offer announcement, on a trailing 3-year basis, PT’s share price has increased by approximately 25%. Additionally, PT has returned considerable cash to shareholders over this period in the form of: (i) dividends of approximately A863 million; and (ii) share buybacks of approximately A944 million. As a result, PT has returned over A1.8 billion (or 22% of its market capitalisation at the beginning of the three-year period) to shareholders over the last three years. Total shareholder return has been approximately 36% during this same period.

. . . And Has a Plan To Deliver Even More Through Sharp Focus on Execution

PT’s management team has established an operating plan which will create substantial value for shareholders going forward. The key elements of this plan include: (i) enhancing the performance of PT’s operations in the evolving domestic competitive landscape, including initiatives such as aggressively rolling out triple-play VoIP offers and offering differentiated broadband services; (ii) segregating wireline access, which potentially represents the first step towards monetisation and regulatory relief; (iii) seeking to promote a model of shared utilisation of mobile networks, which would facilitate the further penetration of 3G services and rapid deployment of mobile TV capabilities; (iv) continuing PT’s existing partnerships and seeking to manage PT’s international assets in a proactive and pragmatic manner in selected markets where PT has a clear competitive advantage; (v) continuing PT’s focus on the operational enhancement of VIVO; and (vi) seeking to concentrate and crystallise the value of selected assets in Africa. This plan will be efficiently implemented by PT’s management team, which features a proven value creation ability.

PT’s plan should result in considerable value creation for shareholders, and is expected to produce A150 million in annual cost savings through streamlining operations and other efficiencies, and A100 million in annual savings from capex and working capital optimisation to be implemented progressively until 2008.

As a result, PT expects to generate 3.0 to 5.0% EBITDA growth and A5.0 to 5.5 billion in operating cash flow over the next 3 years (at current exchange rates).

In combination with an optimisation of its capital structure position while still maintaining an investment grade rating, this translates into a commitment of total shareholder remuneration in excess of A3.0 billion between 2006 and 2008 (equivalent to approximately A2.66 per share). This will take the form of: (i) an ordinary dividend per share of A0.475 for 2005; (ii) a continuation of our progressive dividend policy going forward; and (iii) an extraordinary return of capital—via share buybacks, dividends or a combination thereof—undertaken within 12 months following the rejection of the Offer.

As demonstrated herein, Sonaecom’s Offer significantly undervalues the Company. The Board is committed to maximising shareholder value and believes that the PT management team’s plan will continue to deliver superior value to shareholders going forward.

PT’s board is firmly of the view that the Offer is inadequate and strongly recommends that you reject the Offer.

Ernâni Rodrigues Lopes		Miguel Horta e Costa
Chairman of the Board of Directors		Chief Executive Officer

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In the United States, Portugal Telecom, SGPS, S.A. (the ‘‘Company’’ or ‘‘PT’’) will file a Solicitation/ Recommendation Statement on Schedule 14D-9 with the U.S. Securities and Exchange Commission (the ‘‘SEC’’) following commencement of a tender offer within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended. Investors are urged to read the Company’s Solicitation/ Recommendation Statement on Schedule 14D-9 when it becomes available, as it will contain important information. The Solicitation/Recommendation Statement and other public filings made from time to time by the Company with the SEC are available without charge from the SEC’s website at www.sec.gov and at the Company’s principal executive offices in Lisbon, Portugal.

This communication includes statements that constitute ‘‘forward-looking statements.’’ These statements are based on the beliefs and assumptions of our management and on information available to management at the time such statements were made. Forward-looking statements include, but are not limited to: (a) information concerning possible or assumed future results of our operations, earnings and industry conditions; (b) information or statements concerning potential disadvantages of the tender offer; and (c) statements that are preceded by, followed by or include the words ‘‘believes,’’ ‘‘expects,’’ ‘‘anticipates,’’ ‘‘intends,’’ ‘‘is confident,’’ ‘‘plans,’’ ‘‘estimates,’’ ‘‘may,’’ ‘‘might,’’ ‘‘could,’’ ‘‘would,’’ the negatives of such terms or similar expressions.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Many of the factors that will determine these results are beyond our ability to control or predict. We do not intend to review or revise any particular forward-looking statements referenced in this communication in light of future events or to provide reasons why actual results may differ. Investors are cautioned not to put undue reliance on any forward-looking statements.

Any of the following important factors, and any of those important factors described in our Annual Report on Form 20-F for the year ended December 31, 2004 or in other of our SEC filings, among other things, could cause our results to differ from any results that might be projected, forecast or estimated by us in any such forward-looking statements:

• material adverse changes in economic conditions in Portugal or Brazil;

• exchange rate fluctuations in the Brazilian Real and the U.S. dollar;

• risks and uncertainties related to national and supranational regulation;

• increased competition resulting from the liberalization of the telecommunications sector in Portugal and Brazil;

• the development and marketing of new products and services and market acceptance of such products and services; and

• the adverse determination of disputes under litigation.

This communication is not for publication, release or distribution in any jurisdiction where it would otherwise be prohibited.

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Board of Directors Report

PORTUGAL TELECOM, SGPS, SA
Public Company
Registered Office: Av. Fontes Pereira de Melo, no. 40, Lisboa
Legal Entity: 503 215 058
Share Capital: 1,128,856,500 Euros
Registered with: Lisbon Commercial Registry Office
under no. 3602/940706

Pursuant to and for the purposes of paragraph 1 of article 181 of the Portuguese Securities Code, the Board of Directors of Portugal Telecom, SGPS, SA (hereinafter “PT”), after a careful analysis of the draft offer announcement and the draft prospectus relating to the public tender offer for the acquisition of shares and convertible bonds of PT launched by SONAECOM - SGPS, SA, public company, with registered office at Lugar do Espido, Via Norte, Maia, legal entity no. 502 028 351, registered with the Maia Commercial Registry Office under no. 45 466, share capital 296,526, 868 Euros (according to the notice disclosed by SONAECOM - SGPS, SA at the CMVM’s information disclosure system on January 11, 2006, FRANCE TELECOM S.A. indirectly owns 23.7% of the voting rights of SONAECOM, SGPS, SA) and SONAECOM - BV, with registered office at De Boelelaan, 7, 1083 HJ, Amsterdam, Netherlands, registered with the Amsterdam Commerce Chamber under no. 34 243 137, share capital of 100,000 Euros (the Offerors will be hereinafter jointly referred as “Sonaecom”), which was preliminarily announced on February 6^th, 2006, hereby submits its report on the opportunity and the conditions of the Offer, as follows:

This Report includes forecasts on the economic and financial situation of PT (the “Forecasts”). These Forecasts were produced according to the best knowledge and belief of the Board of Directors of PT (which has taken reasonable care to ensure that such is the case) and were based on the information available at the time such Forecasts were made. Additionally, the assumptions, criteria and consistency of said Forecasts were subject to a written opinion of an auditor dully registered by CMVM. Accordingly, no representation, warranty or undertaking is made nor is any liability accepted by the Board of Directors of PT as to the results forecasted herein.

See sources and bases for calculation of information presented.

In the United States, Portugal Telecom, SGPS, S.A. (the “Company” or “PT”) will file a Solicitation/Recommendation Statement on Schedule 14D-9 with the U.S. Securities and Exchange Commission (the “SEC”) following commencement of a tender offer within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended. Investors are urged to read the Company’s Solicitation/Recommendation Statement on Schedule 14D-9 when it becomes available, as it will contain important information. The Solicitation/Recommendation Statement and other public filings made from time to time by the Company with the SEC are available without charge from the SEC’s website at www.sec.gov and at the Company’s principal executive offices in Lisbon, Portugal.

This communication includes statements that constitute “forward-looking statements”. These statements are based on the beliefs and assumptions of our management and on information available to management at the time such statements were made. Forward-looking statements include, but are not limited to: (a) information concerning possible or assumed future results of our operations, earnings and industry conditions; (b) information or statements concerning potential disadvantages of the tender offer; and (c) statements that are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “intends,” “is confident,” “plans,” “estimates,” “may,” “might,” “could,” “would,” the negatives of such terms or similar expressions.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Many of the factors that will determine these results are beyond our ability to control or predict. We do not intend to review or revise any particular forward-looking statements referenced in this communication in light of future events or to provide reasons why actual results may differ. Investors are cautioned not to put undue reliance on any forward-looking statements.

Any of the following important factors, and any of those important factors described in our Annual Report on Form 20-F for the year ended December 31, 2004 or in other of our SEC filings, among other things, could cause our results to differ from any results that might be projected, forecast or estimated by us in any such forward-looking statements:

• material adverse changes in economic conditions in Portugal or Brazil;

• exchange rate fluctuations in the Brazilian Real and the U.S. dollar;

• risks and uncertainties related to national and supranational regulation;

• increased competition resulting from the liberalisation of the telecommunications sector in Portugal and Brazil;

• the development and marketing of new products and services and market acceptance of such products and services; and

• the adverse determination of disputes under litigation.

This communication is not for publication, release or distribution in any jurisdiction where it would otherwise be prohibited.

Don’t let Sonaecom take your cash flows and future value

• Sonaecom’s offer of €9.50 per share is low and inadequate, significantly undervaluing PT

• Sonaecom plans to use your cash flows to finance its excessively leveraged offer and has no industrial rationale for the transaction

• Sonaecom’s offer is highly uncertain as it is conditional on regulatory approval of unprecedented concentration

• PT has delivered top tier performance, both operationally and in terms of shareholder remuneration

• PT’s strategy will generate more value and cash flow for shareholders with less execution risk

• PT’s management commits to return in excess of €3 billion cash to shareholders between 2006 and 2008

Sonaecom’s offer is inadequate and significantly undervalues PT

Premium on Share Price Prior to Offer

… the premium is less  than one half of precedent transactions  in Europe…

Precedent Transaction Multiples - Firm Value to Last Twelve Months EBITDA

… and is at a significant  discount to precedent  change of control  multiples in the  telecom industry

PT’s cash flow belongs to you. Why should you finance Sonaecom’s offer?

• Sonaecom has a market capitalisation of €1.2bn, less than 1/9 the size of PT…

• … and generated only €62 million of free cash flow in 2004, less than 1/14 of PT’s

• Equity contribution by Sonaecom to the offer is only up to €1.5 billion, less than 10% of the offer value…

• … how would the remaining > 90% (€14.8 billion) be funded? By mortgaging PT’s assets and cash flows?

• Will PT’s cash flows be used exclusively to service Sonaecom’s debt?

Sonaecom’s offer is conditional on regulatory approval of unprecedented concentration

Mobile Subscribers Market Share

Would create the only mobile duopoly in EU, with over 65% market share…

Market Share of Voice Minutes in Portugal

… and would establish a substantially enlarged presence in the Portuguese voic market

Portuguese consumers have enjoyed declining telecom costs…

… but concentration could jeopardise consumer gains

Portugal enjoys higher broadband penetration than Spain, UK, Germany and Italy

Portugal has the second highest mobile penetration in Europe

Portugal has one of the highest Pay-TV penetrations in Europe

Wholesale pricing enables higher margin in comparison to European average

Competitors have cheap access to PT’s local network

When compared to European average, the access cost to the wholesale network allows higher margins

… in which Sonaecom has failed to become a leading alternative to PT

Market Share of Leading  Alternative Operators		Optimus vs Selected 3rd Entrants
Sonaecom is not even the #1 alternative operator…		… and Optimus  underperformed vs selected  3rd entrants…

Mobile Spectrum Fees 01- 05 (€ million)		Fixed to Mobile Termination Rates (€ cents)
… despite significantly lower spectrum fees…		… and being able to charge higher termination rates

Does Sonaecom have a strategy for PT?

PT
will continue to
deliver superior
services to
Portuguese
consumers and
value creation to all
its shareholders

PT has a strong track record of operational and financial performance…

… and has built a solid portfolio of international assets

Sold: Mascom, Primesys and UOL (stake monetised through IPO)

PT has delivered attractive value

PT returned 22% of its market capitalisation to shareholders over the last 3 years… while Sonaecom returned nothing

PT is delivering even more…

… through continuous sharp focus on execution

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Our targets

€150 million annual cost savings to be achieved progressively by 2008

+

€100 million annual savings from capex and working capital optimisation to be achieved progressively by 2008

=

3% to 5% EBITDA growth and €5.0 to 5.5 billion in operating cash flow generated over the next 3 years at current exchange rate

+

Optimising balance sheet strength while maintaining investment grade rating

=

¹ Equivalent to circa €2.66 per share.

Reject
the
offer

APPENDIX 1: BASES OF CALCULATION AND SOURCES OF INFORMATION

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A-2

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Page ix

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A-4

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This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.