UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549

FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
Commission file number 0-25909

Australian Forest Industries
(Exact name of small business issuer as specified in its charter)

Nevada
86-0931332
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

4/95 Salmon Street, Port Melbourne, Victoria
Australia, 3207
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: 011 61 3 8645 4340
 
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X__ No_______
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
 
The number of shares of the issuer’s outstanding common stock, which is the only class of its common equity, on September 30, 2007, was 257,600,680.


ITEM 1 FINANCIAL STATEMENTS

CONTENTS

Consolidated Balance Sheets
F-1
Consolidated Statements of Operations
F-2
Consolidated Statements of Cash Flows
F-3
Notes to Consolidated Financial Statements
F-4


 
AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS
  
   
September 30,
    
December 31,
  
   
2007
    
2006
  
   
(Unaudited)
        
CURRENT ASSETS
            
   Cash
   $
8,737
     $
4,894
  
   Accounts receivable, net
    
454,590
      
1,493,473
  
   Inventory
    
5,406
      
740,384
  
   Prepaid expenses and other
    
122,535
      
33,121
  
          Total Current Assets
    
591,268
      
2,271,872
  
                 
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
                
   depreciation of $4,086,769  and $3,189,690 at September 30, 2007 and
                
   December 31, 2006, respectively
    
19,768,012
      
17,929,297
  
                 
OTHER ASSETS
                
   Long-term timber supply contract, net of amortization of $176,531 and
                
   $124,345 at September 30, 2007 and December 31, 2006, respectively
    
798,899
      
742,307
  
                 
   Total Assets
   $
21,158,179
     $
20,943,476
  

 
 LIABILITIES AND STOCKHOLDERS’ DEFICIT  
CURRENT LIABILITIES
            
   Bank overdraft
   $
3,256,759
     $
1,899,238
  
   Due to National Australia Bank
    
5,863,242
      
5,209,380
  
    Accounts payable
    
7,736,845
      
5,311,101
  
   Current portion of capitalized lease obligations
    
5,537,021
      
1,977,755
  
   Due to Timberman shareholders
    
7,454,632
      
6,593,951
  
   Related party payable
    
721,459
      
641,003
  
   Accrued payroll, related taxes and benefits
    
1,006,996
      
1,213,106
  
               Total Current Liabilities
    
31,576,954
      
22,845,534
  
                 
OTHER LIABILITIES
                
   Capitalized lease obligations
    
817,563
      
3,410,322
  
   Deferred capital gain
    
1,598,318
      
1,521,804
  
               Total Liabilities
    
33,992,835
      
27,777,660
  
                 
STOCKHOLDERS’ EQUITY
                
   Preferred stock, par value $0.001, 5,000,000 shares
                
        authorized, none issued and outstanding
                
   Common stock, par value $0.001, 300,000,000 shares
                
        authorized, 257,600,680 issued and outstanding
                
        in 2007 and 2006, respectively
    
257,600
      
257,600
  
   Additional paid-in capital
    
4,573,217
      
4,573,217
  
   Accumulated other comprehensive income
     (967,462 )    
302,278
  
   Accumulated deficit
     (16,698,011 )     (11,967,279 )
             Total Stockholders’ Deficit
     (12,834,656 )     (6,834,184 )
                 
             Total Liabilities and Stockholders’ Deficit
   $
21,158,179
     $
20,943,476
  

See accompanying notes to financial statements.
 
F-1

AUSTRALIAN FOREST INDUSTRIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



   
For the Three Months Ended
    
For the Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2007
    
2006
    
2007
    
2006
  
                         
REVENUE – SALES
   $
477,244
     $
4,008,572
     $
2,511,403
     $
11,350,633
  
                                 
COSTS AND EXPENSES
                                
Cost of goods sold
    
164,358
      
2,414,890
      
775,946
      
6,525,037
  
Selling, general and administrative
    
585,236
      
2,706,697
      
4,792,956
      
6,737,478
  
Provision for doubtful accounts
    
1,372
      
134,154
      
86,251
      
266,649
  
Interest expense
    
190,268
      
254,564
      
1,176,953
      
647,648
  
Depreciation and amortization
    
169,642
      
149,162
      
493,234
      
436,287
  
Total Costs and Expenses
    
1,110,876
      
5,659,467
      
7,325,340
      
14,613,099
  
                                 
OPERATING LOSS
     (633,632 )     (1,650,895 )     (4,813,937 )     (3,262,466 )
                                 
NON-OPERATING INCOME
                                
Other income
    
21,538
      
12,037
      
42,401
      
145,325
  
Interest income
            
83,555
              
247,586
  
Gain on disposal of assets
    
14,034
      
648
      
40,804
      
104,203
  
Total Non-Operating Income
    
35,572
      
96,240
      
83,205
      
497,114
  
                                 
NET LOSS
   $ (598,060 )     (1,554,655 )   $ (4,730,732 )   $ (2,765,352 )
                                 
NET LOSS PER SHARE
                                
(BASIC AND DILUTED)
   $
0.01
     $
0.01
     $ (0.02 )   $ (0.01 )
                                 
WEIGHTED AVERAGE SHARES
                                
OUTSTANDING
    
257,600,680
      
257,400,680
      
257,600,680
      
257,400,680
  


See accompanying notes to financial statements.
 
F-2
AUSTRALIAN FOREST INDUSTRIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


   
For the Nine Months Ended
  
   
September 30,
  
   
2007
    
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
   Net loss
   $ (4,730,732 )   $ (2,765,352 )
   Adjustments to reconcile net loss to cash flows from
                
      operating activities:
                
      Depreciation and amortization
    
493,234
      
407,419
  
      Stock based compensation
            
70,000
  
      Amortization of leaseback gain
     (40,804 )     (252,150 )
      Changes in operating assets and liabilities:
                
        (Increase)  decrease in prepaid expenses
     (89,414 )    
53,046
  
        (Increase) decrease in inventories
    
734,978
       (562,603 )
        (Increase) decrease in receivables
    
1,038,883
       (1,044,880 )
        (Increase) decrease in Timber contract
    
52,187
      
66,662
  
        Increase (decrease) in accounts payable and other liabilities
    
2,425,744
      
1,990,795
  
        Increase (decrease) in bank overdraft
    
1,357,521
      
1,989,217
  
        Increase (decrease) in related party payable
            
13,643
  
        Increase (decrease) in accrued payroll
     (206,109 )    
299,350
  
        Increase (decrease) in taxes payable
            
69,437
  
              Net Cash Provided by (Used in) Operating Activities
    
1,035,488
      
334,584
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
    Capital additions
     (85,016 )     (3,833,830 )
             Net Cash Used in Investing Activities
     (85,016 )     (3,833,830 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
    Loans from shareholders
    
33,032
      
2,777,287
  
    Capital leases
    
202,559
      
554,609
  
    National Australian Bank loan
            
110,880
  
    Sale leaseback deferred credit
    
76,514
      
37,083
  
           Net Cash Provided By (Used In) Financing Activities
    
312,105
      
3,479,859
  
                 
EFFECT OF EXCHANGE RATES ON CASH
     (1,258,734 )     (107,627 )
INCREASE (DECREASE) IN CASH
    
3,843
       (127,014 )
CASH AT BEGINNING OF PERIOD
    
4,894
      
127,014
  
CASH AT END OF PERIOD
   $
8,737
     $  
 

See accompanying notes to financial statements.
 
F-3

AUSTRALIAN FOREST INDUSTRIES AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
September 30, 2007

 
NOTE A - BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. Results for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the financial statements and footnotes thereto included in the Australian Forest Industries annual report on Form 10-KSB for the year ended December 31, 2006.

NOTE B - GOING CONCERN

As indicated in the accompanying financial statements, the Company incurred a net loss of $4,730,732 for the nine months ended September 30, 2007, and has a Stockholders’ Deficit of $12,834,656 at September 30, 2007.   Management's plans include the raising of capital through the equity markets to fund future operations, seeking additional acquisitions, and generating of revenue through its business. Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenue will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. Additionally, during the fourth quarter of 2006, the Company experienced a severe liquidity problem and was having difficulty obtaining logs to operate its businesses. Currently, management has entered into a processing contract with Weyerhaeuser to process their logs for which the Company is receiving a processing fee. The Company’s wholly owned subsidiary in Australia, Integrated Forest Products, is currently under administration in Australia (in the U.S. this is tantamount to a Chapter 11 Bankruptcy).  There is no assurance that the company will emerge from the administrative proceedings and be self-sufficient and profitable. (See Note D to the Financial Statement.) These matters raise substantial doubt about the Company's ability to continue as a going concern. However, the accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE C – LITIGATION

Oz Investmentcorp Pty Ltd. initiated a letter of demand for the $1,578,600 due from the Timbermans Group for full payment of funds lent to the Timbermans Group.  The Company is currently negotiating with Oz and had agreed to provide additional collateral.
 
On November 14, 2007, the Company was named as a co-defendant in a lawsuit brought in the High Court of Justice Chancery Division, England by Courical Holding B.V. (“Plaintiff”) whereby it is alleged that the Plaintiff invested $650,000 in Zebra Mining Services Limited (“Co-Defendant”) in exchange for 325,000 shares of Company common stock and 325,000 warrants to purchase Company common stock pursuant to an agreement between the three parties. The Plaintiff alleges that it never received any consideration for its investment from either the Co-Defendant or the Company. Although the Company anticipates submitting an answer to such Complaint, it has not currently done so as it is considering its course of action thereto.
 
NOTE D - ADMINISTRATION

The Company’s wholly owned subsidiary in Australia, Integrated Forest Products, is currently in Administration and is being operated by Court appointed administrators.  Administration in Australia is  similar to Chapter 11 Bankruptcy or receivership in the U.S.  There is no assurance that the Company’s subsidiary will emerge from the administrative proceedings.

F-4

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

It should be noted that this Management's Discussion and Analysis of Financial Condition and Results of Operations may contain "forward-looking statements." The terms "believe," "anticipate," "intend," "goal," "expect," and similar expressions may identify forward-looking statements. These forward-looking statements represent the Company's current expectations or beliefs concerning future events. The matters covered by these statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the Company's dependence on weather-related factors, introduction and customer acceptance of new products, the impact of competition and price erosion, as well as supply and manufacturing restraints and other risks and uncertainties. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation that the strategy, objectives or other plans of the Company will be achieved. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

As indicated in the accompanying financial statements, the Company incurred a net loss of $4,730,732 for the nine months ended September 30, 2007, and has a Stockholders’ Deficit of $12,834,656 at September 30, 2007.   Management's plans include the raising of capital through the equity markets to fund future operations, seeking additional acquisitions, and generating of revenue through its business. Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenue will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. Additionally, during the fourth quarter of 2006, the Company experienced a severe liquidity problem and was having difficulty obtaining logs to operate its businesses. Currently, management has entered into a processing contract with Weyerhaeuser to process their logs for which the Company is receiving a processing fee. The Company’s wholly owned subsidiary in Australia, Integrated Forest Products, is currently under administration in Australia (in the U.S. this is tantamount to a Chapter 11 Bankruptcy).  There is no assurance that the company will emerge from the administrative proceedings and be self-sufficient and profitable. (See Note D to the Financial Statement.) These matters raise substantial doubt about the Company's ability to continue as a going concern. However, the accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Oz Investmentcorp Pty Ltd. initiated a letter of demand for the $1,578,600 due from the Timbermans Group for full payment of funds lent to the Timbermans Group.  The Company is currently negotiating with Oz and had agreed to provide additional collateral.
 
On November 14, 2007, the Company was named as a co-defendant in a lawsuit brought in the High Court of Justice Chancery Division, England by Courical Holding B.V. (“Plaintiff”) whereby it is alleged that the Plaintiff invested $650,000 in Zebra Mining Services Limited (“Co-Defendant”) in exchange for 325,000 shares of Company common stock and 325,000 warrants to purchase Company common stock pursuant to an agreement between the three parties. The Plaintiff alleges that it never received any consideration for its investment from either the Co-Defendant or the Company. Although the Company anticipates submitting an answer to such Complaint, it has not currently done so as it is considering its course of action thereto.

The Company’s wholly owned subsidiary in Australia, Integrated Forest Products, is currently in Administration and is being operated by Court appointed administrators.  Administration in Australia is similar to Chapter 11 Bankruptcy or receivership in the U.S.  There is no assurance that the Company’s subsidiary will emerge from the administrative proceedings.

We are currently seeking alternative business operations and any transaction that would involve the sale of most or all of our assets.  If and when such sale has been completed, we will seek to use the proceeds from such sale, after satisfying our current liabilities, to develop or acquire a business or businesses which we believe will best serve the long term interests of our shareholders. Such businesses may or may not be related to the timber industry.

RESULTS OF OPERATIONS

Operating costs for the three-months ended September 30, 2007 aggregated $1,110,876. This includes costs incurred in general and administrative selling of $585,236.  We incurred an operating loss of $(633,632) and a total net loss of $(598,060) or $(0.01) per share.

Operating costs for the nine-month period ended September 30, 2007 aggregated $(4,813,937). This includes general and administrative selling of $4,792,956 and interest expenses of $1,176,953.  As a result of the above we realized a net loss of $(4,730,732) for the nine-month period ended September 30, 2007 or $(0.01) per share.

LIQUIDITY AND CAPITAL RESOURCES

On September 30, 2007 we had current assets of $21,158,179 and on December 31, 2006 we had current assets of $20,943,476.

Net cash provided by operating activities for the nine-month period ended September 30, 2007 was $1,035,488. Net cash used in investing activities for the six-month period ended September 30, 2007 was $(85,016).  Net cash provided by financing activities was $312,105 for this period.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s discussion and analysis of its financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluates its estimates, including those related to bad debts, income taxes and contingencies and litigation.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements Affecting The Company:

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48, “Accounting for Income Tax Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company expects to adopt the provisions of FIN 48 beginning in the first quarter of 2007.  The Company is currently in the process of determining the impact, if any, of adopting the provisions of FIN 48 on its financial position, results of operations and liquidity.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under other accounting pronouncements that permit or require fair value measurements, changes the methods used to measure fair value and expands disclosures about fair value measurements. In particular, disclosures are required to provide information on the extent to which fair value is used to measure assets and liabilities; the inputs used to develop measurements; and the effect of certain of the measurements on earnings (or changes in net assets). SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption, as of the beginning of an entity’s fiscal year, is also permitted, provided interim financial statements have not yet been issued. The Company expects to adopt the provisions of FIN 48 beginning in the first quarter of 2008.  The Company is currently evaluating the potential impact, if any, that the adoption of SFAS No. 157 will have on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 does not change the guidance in SAB No. 99, “Materiality,” when evaluating the materiality of misstatements.

SAB No. 108 is effective for fiscal years ending after November 15, 2006. Upon initial application, SAB No. 108 permits a one-time cumulative effect adjustment to beginning retained earnings. The Company adopted SAB No. 108 for the fiscal year ended December 31, 2006.  Adoption of SAB No. 108 did not have a material impact on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”).  SFAS 159 allows entities to measure at fair value many financial instruments and certain other assets and liabilities that are not otherwise required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have not determined what impact, if any, that adoption will have on our results of operations, cash flows or financial position.

ITEM 3. CONTROLS AND PROCEDURES
 
(a) Our principal executive officer and principal financial officer have each evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing date of this quarterly report and have each concluded that our disclosure controls and procedures are adequate.
 
(b) There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
(c) Not applicable



PART II
Item 1. Legal Proceedings

Oz Investmentcorp Pty Ltd. initiated a letter of demand for the $1,578,600 due from the Timbermans Group for full payment of funds lent to the Timbermans Group.  The Company is currently negotiating with Oz and had agreed to provide additional collateral.
 
On November 14, 2007, the Company was named as a co-defendant in a lawsuit brought in the High Court of Justice Chancery Division, England by Courical Holding B.V. (“Plaintiff”) whereby it is alleged that the Plaintiff invested $650,000 in Zebra Mining Services Limited (“Co-Defendant”) in exchange for 325,000 shares of Company common stock and 325,000 warrants to purchase Company common stock pursuant to an agreement between the three parties. The Plaintiff alleges that it never received any consideration for its investment from either the Co-Defendant or the Company. Although the Company anticipates submitting an answer to such Complaint, it has not currently done so as it is considering its course of action thereto.

Item 2. Changes in Securities
None

Item 3. Defaults Upon Senior Securities
None

Item 4. Submission of Matters to a Vote of Security Holders
None

Item 5. Other Information
None

Item 6. Exhibits and Reports on Form 8-K

a. Exhibit Index

Exhibit 31.1 Certification of Chief Executive Officer

Exhibit 31.2 Certification of Chief Financial Officer

Exhibit 32.1 Certification of Chief Executive Officer

Exhibit 32.1 Certification of Chief Financial Officer

b. Reports on Form 8-K
 
None.


SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AUSTRALIAN FOREST INDUSTRIES

/s/ Michael Timms
Name: Michael Timms
Title: CEO, President and Chairman of the Board
Date:  November 16, 2007

/s/ Colin Baird
Name: Colin Baird
Title: Chief Financial Officer
Date: November 16, 2007