Aquilaria agallocha Roxb., the sasi tree of Assam, is the chief source of agar or eaglewood of commerce which is highly prized in perfumery. However, the dark coloured scented wood, to which the name agar is applied, is not found in all trees of this species, and the factors responsible for its occurrence in only a small percentage of trees are not properly understood. This paper compares the anatomical structure of the scented and unscented wood as a contribution towards a better understanding of agar formation. The most striking feature of the normal secondary wood of agar wood is the presence of interxylary or included phloem of the diffuse (foraminate) type. Microscopic examination reveals that in the scented wood the aromatic oleo-resin is mainly concentrated in the included phloem. Furthermore, septate fungal hyphae which are normally absent in sound wood have been observed in the scented wood. Another difference is the occurrence of tissue (abnormal tertiary tissue) which arises from a secondary cambium in some of the included phloem strands. The consistent occurrence of abnormal tertiary tissue only in the included phloem of scented wood suggests that there may be some connection between this tertiary tissue and the formation of agar. Changes in the included phloem and the formation of abnormal tertiary tissue in scented specimens appear to be caused by some physiological disturbances (e.g., wounding, insect or fungal attack).