The Third Annual Report of the "European Observatory for SMEs" has been published in response to a request from DG XXIII of the European Commission. The report was prepared by the European Network for SME Research (ENSR), comprising 16 partner national research institutes, and coordinated by the EIM Small Business Research and Consultancy. The report presents the latest developments and prospects in the EU, including the new Member States and Norway, for small and medium-sized enterprises (SMEs). It analyses the situation and perspective of SMEs in the European economy, by monitoring their performance in various fields and examining the effects of the internal market on SMEs. The report reveals that the recovery of the European economy is highly export-driven and larger enterprises have benefited more than SMEs. In addition, employment growth lags behind production growth in SMEs. Compared with the 1988-1993 period when SMEs more than compensated for job losses in larger enterprises, as slow recovery was preceded by a slow-down in the growth of the number of enterprises in Europe, the employment situation of SMEs is now stagnating. The First Annual Report was published in May 1993 and concentrated on the structure of SMEs and their fields of operation. The Second Annual Report, published in April 1994, reviewed developments that affected SMEs.