Australian aid to Nepal and Australian foresters' assistance to Nepalese forestry have been very influential in the recent development of forestry in Nepal, a country widely acknowledged as being at the forefront of community forestry. This paper examines the experience of three Forest Users Groups (Laglage Pakha, Bagbhanjyang and Pragatisil) participating in the Nepalese community forestry programme. Using a mix of qualitative and quantitative methods, information was obtained from 72 households, 21 key respondents, 6 focus group discussions and 3 vegetation assessments. The study demonstrates that the condition of forests has improved compared with the highly-degraded state from which most community forests started, but that community forestry may not have produced the significant biodiversity conservation outcomes expected by many of its supporters. Further, the forests were found to be underutilized, largely because powerful actors emphasize protection-oriented management to ensure forest conservation. As a result local communities, particularly poorer groups, gain little benefit. We conclude that the sustainable conservation as well as utilization of forests managed by local communities is a major challenge requiring a deeper understanding of the political ecology of community forestry.