Wood (also termed secondary xylem) is the most abundant biomass produced by plants, and is one of the most important sinks for atmospheric carbon dioxide. The development of wood begins with the differentiation of the lateral meristem, vascular cambium, into secondary xylem mother cells followed by cell expansion, secondary wall deposition, programmed cell death, and finally heartwood formation. Significant progress has been made in the past decade in uncovering the molecular players involved in various developmental stages of wood formation in tree species. Hormonal signalling has been shown to play critical roles in vascular cambium cell proliferation and a peptide-receptor-transcription factor regulatory mechanism similar to that controlling the activity of apical meristems is proposed to be involved in the maintenance of vascular cambium activity. It has been demonstrated that the differentiation of vascular cambium into xylem mother cells is regulated by plant hormones and HD-ZIP III transcription factors, and the coordinated activation of secondary wall biosynthesis genes during wood formation is mediated by a transcription network encompassing secondary wall NAC and MYB master switches and their downstream transcription factors. Most genes encoding the biosynthesis enzymes for wood components (cellulose, xylan, glucomannan, and lignin) have been identified in poplar and a number of them have been functionally characterized. With the availability of genome sequences of tree species from both gymnosperms and angiosperms, and the identification of a suite of wood-associated genes, it is expected that our understanding of the molecular control of wood formation in trees will be greatly accelerated.