Why are Portugal 3rd? I've been asked this question a couple of times, so here's a quick post to answer.
There's one reason: Antonio Leonel Vilar Nogueira de Sousa, also known as Tonel. Portugal climbed to 3rd in the FIFA rankings (their best ever ranking) in the 63rd minute of their friendly against China PR, played on March 3rd in Coimbra (read the match report).
When Carlos Queiroz replaced Bruno Alves with Tonel, the match lost its A match status and it wasn't included in the FIFA ranking calculations, as I mentioned in one of the March 2010 FIFA ranking previews. Why? Because teams are allowed a maximum of 6 substitutions in a friendly match (see FIFA's circular no. 1150) - and Tonel was the 7th. Of course, the Chinese made the 6th and 7th substitions nine minutes later, so the match would have lost its A match status anyway.
Of Portugal's 1249 points (1248.844 to be more precise), 735.788 (6622 from 9 matches) are from the last 12 months. With the China match included (324.675 points), Portugal would have had 6946.675 points from 10 matches - for an average of 694.6675 points, thus losing 41 points. That would still be good enough for 4th place in the April ranking.
Portugal's 5 most valuable results are the Bosnia-Herzegovina wins in the WC play-off (2 x 131.67), the Hungary wins (2 x 127.50) and the Albania win (90).
You also have to take into account the fact that Portugal got two extremely valuable wins against Bosnia-Herzegovina (ranked 42nd at the time), while the other top 10 teams (France excepted) played friendlies, bringing their average down. Same story on March 3rd - Portugal "didn't play", while the other teams again played friendlies bringing their average down.
One final answer to this comment:
"While Portugal hasn't lost since Sept. 2008, they really haven't beaten any one either. The highest rated opponent they beat are currently ranked 49th. Does strength of schedule factor into this ranking at all? Or can a team make it all the way to the top by bulking up on a steady diet of minnows?"
Bosnia-Herzegovina were 42nd at the time of their matches against Portugal. Yes, it's about averages. Check the detailed totals section. No, you can't make your way to the top by defeating minnows in friendly games. Actually, for teams in the top 20 is usually better to avoid playing friendlies.