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                                                                 EXHIBIT 10.15.1

                  2002 REDWOOD TRUST, INC. INCENTIVE STOCK PLAN

                          (LAST AMENDED MARCH 4, 2004)

SECTION 1.        GENERAL PURPOSE OF PLAN; DEFINITIONS.

         The name of this plan is the 2002 Redwood Trust, Inc. Incentive Stock
Plan (the "Plan"). The Plan was adopted by the Board on March 21, 2002 and
approved by the Company's stockholders on May 9, 2002. The Board approved
amendments to the Plan on March 4, 2004 and directed that the amended Plan be
submitted to stockholders of the Company for approval. The purpose of the Plan
is to enable the Company and its Subsidiaries to obtain and retain competent
personnel who will contribute to the Company's success by their ability,
ingenuity, and industry, to give the Company's non-employee directors a
proprietary interest in the Company, and to provide incentives to the
participating directors, officers and other key employees, and agents and
consultants, that are linked to performance measures and will therefore inure to
the benefit of all stockholders of the Company.

         For purposes of the Plan, the following terms shall be defined as set
forth below:

         (1)      "Administrator" means the Board, or as long as the Company is
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, or as required under Section 162(m) of the Code, the Committee
appointed by the Board.

         (2)      "Board" means the Board of Directors of the Company.

         (3)      "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor thereto.

         (4)      "Committee" means the Compensation Committee of the Board,
which shall be composed of not less than three Board members who shall be (i)
Independent as defined by the rules of the New York Stock Exchange, as they may
be amended from time to time; (ii) a Non-Employee Director as defined in Rule
16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as
amended; and (iii) an Outside Director as defined under Section 162(m) of the
Internal Revenue Code of 1986, as amended, and rules promulgated thereunder.

         (5)      "Company" means Redwood Trust, Inc., a corporation organized
under the laws of the State of Maryland (or any successor corporation).

         (6)      "DERs" shall mean dividend equivalent rights, which are the
right to receive amounts on related Stock awards that are linked to dividends on
the Stock and that may be paid currently in cash or Stock, or accrued in shares
of deferred stock with or without compounding through subsequent payments or
accruals on the accrued shares. Payment of such deferred stock from DER accruals
on Stock Options and Stock Appreciation Rights may or may not be contingent upon
the exercise of the related award, as determined by the Committee at the time of
grant.


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         (7)      "Deferred Stock" means an award granted pursuant to Section 7
of the right to receive Stock at the end of a specified deferral period or on
such other bases as the Administrator may determine.

         (8)      "Disability" means permanent and total disability as
determined under the Company's disability program or policy.

         (9)      "Effective Date" shall mean the date provided pursuant to
Section 11.

         (10) "Eligible Employee" means an employee of the Company or any
Subsidiary, and any person to whom an offer of employment is made by the Company
or any Subsidiary, eligible to participate in the Plan pursuant to Section 4.

         (11)     "Eligible Non-Employee Director" means a member of the Board
or the board of directors of any Subsidiary who is not a bona fide employee of
the Company or any Subsidiary and who is eligible to participate in the Plan
pursuant to Section 4.

         (12)     "Fair Market Value" means, as of any given date, with respect
to any awards granted hereunder, at the discretion of the Administrator and
subject to such limitations as the Administrator may impose, the closing sale
price of the Stock on the next preceding business day as reported in the Western
Edition of the Wall Street Journal Composite Tape.

         (13)     "GAAP" means, for any day, generally accepted accounting
principles, applied on a consistent basis, stated in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants, or in statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by another
entity or entities as may be approved by a significant segment of the accounting
profession, that are applicable to the circumstances for that day.

         (14)     "Incentive Stock Option" means any Stock Option intended to be
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.

         (15)     "Non-Employee Director" shall have the meaning set forth in
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended.

         (16)     "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option, including any Stock Option that provides (as of
the time such option is granted) that it will not be treated as an Incentive
Stock Option.

         (17)     "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock possessing
50% or more of the combined voting power of all classes of stock in one of the
other corporations in the chain.

         (18)     "Participant" means any Eligible Employee, Non-Employee
Director, or consultant or agent of the Company or any Subsidiary selected by
the Committee, pursuant to the Administrator's authority in Section 2, to
receive grants under the Plan.

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         (19)     "Performance Share" means an award of shares of Stock granted
pursuant to Section 7 that is subject to restrictions based upon the attainment
of specified performance objectives.

         (20)     "Prior Plan" means the Company's Amended and Restated 1994
Executive and Non-Employee Director Stock Option Plan.

         (21)     "Restricted Stock" means an award granted pursuant to Section
7 of shares of Stock, subject to restrictions that will lapse with the passage
of time or on such other bases as the Administrator may determine.

         (22)     "Stock" means the common stock, $0.01 par value, of the
Company.

         (23)     "Stock Appreciation Right" means the right pursuant to an
award granted under Section 6 to receive an amount equal to the difference
between (A) the Fair Market Value, as of the date such Stock Appreciation Right
or portion thereof is surrendered, of the shares of Stock covered by such right
or such portion thereof, and (B) the aggregate exercise price of such right or
such portion thereof.

         (24)     "Stock Option" means an option to purchase shares of Stock
granted pursuant to Section 5.

         (25)     "Subsidiary" means (A) any corporation (other than the
Company) or other entity whose assets and liabilities are consolidated with
those of the Company on the Company's consolidated balance sheet and (B) any
other business venture designated by the Administrator in which the Company has
a significant interest, as determined in the discretion of the Administrator.

SECTION 2.        ADMINISTRATION.

         The Plan shall be administered by the Administrator, except as
otherwise expressly provided herein.

         The Administrator shall have the power and authority to grant to
Participants pursuant to the terms of the Plan: (a) Stock Options, (b) Stock
Appreciation Rights, (c) Restricted Stock, (d) Deferred Stock, (e) Performance
Shares or (f) any combination of the foregoing. DERs may be granted in
conjunction with any of the Stock awards listed above.

         In addition, the Administrator shall have the authority:

         (a)      to select those employees and prospective employees of the
Company or any Subsidiary who shall be Eligible Employees;

         (b)      to determine whether and to what extent Stock Options (with or
without DERs), Stock Appreciation Rights, Restricted Stock, Deferred Stock,
Performance Shares or a combination of the foregoing, are to be granted to
Participants hereunder;

         (c)      to determine the number of shares to be covered by each such
award granted hereunder;

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         (d)      to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, (x) the restricted period applicable to Restricted or Deferred Stock
awards and the date or dates on which restrictions applicable to such Restricted
or Deferred Stock shall lapse during such period, and (y) the performance goals
and periods applicable to the award of Performance Shares); and

         (e)      to determine the terms and conditions, not inconsistent with
the terms of the Plan, which shall govern all written instruments evidencing the
Stock Options, DERs, Stock Appreciation Rights, Restricted Stock, Deferred
Stock, Performance Shares or any combination of the foregoing.

         The Administrator may designate whether any award being granted to any
Participant is intended to be "performance-based compensation" as that term is
used in Section 162(m) of the Code. Any such awards designated as
"performance-based compensation" shall be conditioned on the achievement of one
or more performance measures. The performance measures that may be used by the
Administrator for such awards shall be based on any one or more of the
following, as selected by the Administrator: revenue; revenue per employee; GAAP
earnings; taxable earnings; GAAP or taxable earnings per employee; GAAP or
taxable earnings per share (basic or diluted); operating income; total
stockholder return; dividends paid or payable; market share; profitability as
measured by return ratios, including return on revenue, return on assets, return
on equity, and return on investment; cash flow; or economic value added
(economic profit); and such criteria generally must be specified in advance and
may relate to one or any combination of two or more corporate, group, unit,
division, affiliate, or individual performances. For awards intended to be
"performance-based compensation," the grant of the awards, the establishment of
the performance measures, and the certification that the performance goals were
satisfied shall be made during the period and in the manner required under Code
Section 162(m).

         The Administrator shall have the authority, in its discretion, to
adopt, alter, and repeal such administrative rules, guidelines, and practices
governing the Plan as it shall from time to time deem advisable; to interpret
the terms and provisions of the Plan and any award issued under the Plan (and
any agreements relating thereto); and to otherwise supervise the administration
of the Plan.

         All decisions made by the Administrator pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Company, any
Subsidiaries and the Participants. Notwithstanding the foregoing or anything
else to the contrary in the Plan, any action or determination by the
Administrator specifically affecting or relating to an award to a Non-Employee
Director shall be approved and ratified by the Board.

         Notwithstanding anything to the contrary herein, no award hereunder may
be made to any Participant to the extent that, following such award, the shares
subject or potentially subject to such Participant's control (including, but not
limited to, (i) shares of the Company's equity stock owned by the Participant,
(ii) shares of Stock subject to awards granted to the Participant under the
Prior Plan (whether such awards are then exercisable or vested), (iii) Stock
Options, whether or not then exercisable, held by the Participant to purchase
additional such shares, (iv) Restricted Stock, Deferred Stock, and Performance
Share awards to the Participant, whether or not then vested, and (v) shares of
Stock accrued under DERs awarded to the Participant) would constitute more than
9.8% of the outstanding capital stock of the Company.

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SECTION 3.        STOCK SUBJECT TO PLAN.

(1)      Subject to the following provisions of this Section 3, the maximum
number of shares of Stock that may be issued with respect to awards granted
under the Plan subsequent to the approval of Plan amendments on March 4, 2004
shall be equal to the sum of: (i) 735,000 shares of Stock; (ii) 148,540 shares
of Stock remaining available for grant under the Plan immediately prior to the
Board approval of the March 4, 2004 Plan amendments; (iii) any shares of Stock
that are represented by awards granted under the Prior Plan which are (A)
forfeited, expire, or are canceled without delivery of shares of Stock or (B)
settled in cash; and (iv) any shares of Stock that are represented by awards
granted under the Prior Plan which are tendered to the Company (by either
actual delivery or attestation) to satisfy the exercise price of Stock Options
or the applicable tax withholding obligation.

         (2)      Any shares of Stock covered by an award that is forfeited or
canceled, or shares of stock not delivered because the award is settled in cash
or used to satisfy the applicable tax withholding obligation, shall not be
deemed to have been issued for purposes of determining the maximum number of
shares of Stock available for future awards under the Plan.

         (3)      If the exercise price of any Stock Option granted under the
Plan is satisfied by tendering shares of Stock to the Company (by either actual
delivery or by attestation), only the number of shares of Stock issued net of
the shares of Stock tendered shall be deemed issued for purposes of determining
the maximum number of shares of Stock available for future awards under the
Plan.

         (4)      Subject to Section 3(5), the following additional maximums are
imposed under the Plan:

                  (a) The maximum number of shares of Stock that may be the
subject of awards granted as Incentive Stock Options under the Plan shall be
500,000 shares (regardless of whether the awards are canceled, forfeited, or
materially amended or the shares subject to any such awards are surrendered).

                  (b) The maximum number of shares that may be the subject of
awards granted to any one individual pursuant to Sections 5 and 6 (relating to
Stock Options and Stock Appreciation Rights) shall be 500,000 shares during any
calendar year (regardless of whether such awards are canceled, forfeited, or
materially amended or the shares subject to any such award are surrendered).

                  (c) No more than 500,000 shares of Stock may be the subject of
awards under the Plan granted to any one individual during any one-calendar-year
period (regardless of when such shares are deliverable or whether the awards are
forfeited, canceled or materially amended or the shares subject to any such
award are surrendered) if such awards are intended to be "performance-based
compensation" (as the term is used for purposes of Code Section 162(m)).

                  (d) Shares of Stock issued under the Plan or covered by awards
granted under the Plan pursuant to the settlement, assumption or substitution of
outstanding awards or obligations to grant future awards as a condition of the
Company acquiring another entity shall not count against the maximum number of
shares available for future awards under the Plan.

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         (5) In the event of a corporate transaction involving the Company
(including, without limitation, any stock dividend, stock split, extraordinary
cash dividend, recapitalization, reorganization, merger, consolidation,
split-up, spin-off, combination, or exchange of shares), the Administrator may
adjust awards to preserve the benefits or potential benefits of the awards.
Action by the Administrator may include: (i) adjustment of the number and kind
of shares which may be delivered under the Plan; (ii) adjustment of the number
and kind of shares subject to outstanding awards; (iii) adjustment of the
exercise price of outstanding Stock Options and Stock Appreciation Rights; and
(iv) any other adjustments that the Administrator determines to be equitable, in
its sole discretion.

SECTION 4.        ELIGIBILITY.

         Officers and other key employees of the Company or Subsidiaries who are
responsible for or contribute to the management, growth, and/or profitability of
the business of the Company or its Subsidiaries, Non-Employee Directors, and
consultants and agents of the Company or its Subsidiaries, shall be eligible to
be granted Stock Options, DERs, Stock Appreciation Rights, Restricted Stock,
Deferred Stock or Performance Shares hereunder. The Participants under the Plan
shall be selected from time to time by the Administrator, in its sole
discretion, from among those eligible.

SECTION 5.        STOCK OPTIONS.

         Stock Options may be granted alone or in addition to other awards
granted under the Plan, including DERs. Any Stock Option granted under the Plan
shall be in such form as the Administrator may from time to time approve, and
the provisions of Stock Option awards need not be the same with respect to each
optionee. Recipients of Stock Options shall enter into a Stock Option agreement
with the Company, in such form as the Administrator shall determine, which
agreement shall set forth, among other things, the exercise price, the term, and
provisions regarding exercisability of the Stock Option granted thereunder.

         The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.

         The Administrator shall have the authority under this Section 5 to
grant any optionee (except Eligible Non-Employee Directors) Incentive Stock
Options, Non-Qualified Stock Options, or both types of Stock Options (in each
case with or without DERs or Stock Appreciation Rights), provided, however, that
Incentive Stock Options may not be granted to any individual who is not an
employee of the Company or its Subsidiaries. To the extent that any Stock Option
does not qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock Option. More than one option may be granted to the same
optionee and be outstanding concurrently hereunder.

         Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Administrator shall deem
desirable:

         (1)      Option Price. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Administrator in its sole
discretion at the time of grant but shall not be less than 100% of the Fair
Market Value of the Stock on such date, and shall not, in


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any event, be less than the par value of the Stock. If an employee owns or is
deemed to own (by reason of the attribution rules applicable under Section
425(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation or Subsidiary and an Incentive
Stock Option is granted to such employee, the option price of such Incentive
Stock Option (to the extent required by the Code at the time of grant) shall be
no less than 110% of the Fair Market Value of the Stock on the date such
Incentive Stock Option is granted.

         (2)      Option Term. The term of each Stock Option shall be fixed by
the Administrator, but no Stock Option shall be exercisable more than ten years
after the date such Stock Option is granted; provided, however, that if an
employee owns or is deemed to own (by reason of the attribution rules of Section
425(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation or Subsidiary and an Incentive
Stock Option is granted to such employee, the term of such Incentive Stock
Option (to the extent required by the Code at the time of grant) shall be no
more than five years from the date of grant.

         (3)      Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Administrator at or after grant. The Administrator may provide, in its
discretion, that any Stock Option shall be exercisable only in installments, and
the Administrator may waive such installment exercise provisions at any time in
whole or in part based on such factors as the Administrator may determine, in
its sole discretion. To the extent not exercised, installments shall accumulate
and be exercisable in whole or in part at any time after becoming exercisable
but not later than the date the Stock Option expires.

         (4)      Method of Exercise. Subject to Section 5(3), Stock Options may
be exercised in whole or in part at any time during the option period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased, accompanied by payment in full of the purchase price in cash or its
equivalent as determined by the Administrator. The Administrator may also permit
a Participant to elect to pay the exercise price upon the exercise of a Stock
Option by irrevocably authorizing a third party to sell shares of Stock (or a
sufficient portion of the shares) acquired upon exercise of the Stock Option and
remit to the Company a sufficient portion of the sale proceeds to pay the entire
exercise price and any tax withholding resulting from such exercise. As
determined by the Administrator, in its sole discretion, payment in whole or in
part may also be made by surrendering unrestricted Stock already owned by the
optionee, or, in the case of the exercise of a Non-Qualified Stock Option,
Restricted Stock, or Performance Shares subject to an award hereunder (based, in
each case, on the Fair Market Value of the Stock on the date the option is
exercised); provided, however, that in the case of an Incentive Stock Option,
the right to make payment in the form of already owned shares may be authorized
only at the time of grant. Any payment in the form of stock already owned by the
optionee may be effected by use of an attestation form approved by the
Administrator. If payment of the option exercise price of a Non-Qualified Stock
Option is made in whole or in part in the form of Restricted Stock or
Performance Shares, the shares received upon the exercise of such Stock Option
(to the extent of the number of shares of Restricted Stock or Performance Shares
surrendered upon exercise of such Stock Option) shall be restricted in
accordance with the original terms of the Restricted Stock or Performance Share
award in question, except that the Administrator may direct that such
restrictions shall apply only to that number of shares equal to the number of
shares surrendered upon the exercise of such option. An optionee shall generally


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have the rights to dividends and other rights of a stockholder with respect to
shares subject to the option only after the optionee has given written notice of
exercise, has paid in full for such shares, and, if requested, has given the
representation described in paragraph (1) of Section 11.

         (5)      Limits on Transferability of Options.

                  (a)  Subject to Section 5(5)(b), no Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution or pursuant to a "qualified domestic relations order," as such
term is defined in the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee or in accordance with the terms of a
qualified domestic relations order.

                  (b)  The Administrator may, in its discretion, authorize all
or a portion of the Non-Qualified Stock Options to be granted to an optionee to
be on terms which permit transfer by such optionee to (i) the spouse, qualified
domestic partner, children, or grandchildren of the optionee and any other
persons related to the optionee as may be approved by the Administrator
("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit
of such Immediate Family Members, (iii) a partnership or partnerships in which
such Immediate Family Members are the only partners, or (iv) any other persons
or entities as may be approved by the Administrator, provided that (x) there may
be no consideration for any transfer unless approved by the Administrator, (y)
the stock option agreement pursuant to which such options are granted must be
approved by the Administrator, and must expressly provide for transferability in
a manner consistent with this Section 5(5)(b), and (z) subsequent transfers of
transferred Stock Options shall be prohibited except those in accordance with
Section 5(5)(a) or expressly approved by the Administrator. Following transfer,
any such Stock Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that,
except for purposes of Sections 5(6) and 10(3) hereof, the terms "optionee,"
"Stock Option holder" and "Participant" shall be deemed to refer to the
transferee. The events of termination of employment contained in the option
agreement with respect to such Stock Options shall continue to be applied with
respect to the original optionee, following any which event the Stock Options
shall be exercisable by the transferee only to the extent, and for the periods
specified in such option agreements. Notwithstanding the transfer, the original
optionee will continue to be subject to the provisions of Section 10(3)
regarding payment of taxes, including the provisions entitling the Company to
deduct such taxes from amounts otherwise due to such optionee. Any transfer of a
Stock Option that was originally granted with DERs related thereto shall
automatically include the transfer of such DERs, any attempt to transfer such
Stock Option separately from such DERs shall be void, and such DERs shall
continue in effect according to their terms. "Qualified domestic partner" for
the purpose of this Section 5(5)(b) shall mean a domestic partner living in the
same household as the optionee and registered with, certified by, or otherwise
acknowledged by the county or other applicable governmental body as a domestic
partner or otherwise establishing such status in any manner satisfactory to the
Administrator.

         (6)      Annual Limit on Incentive Stock Options. To the extent that
the aggregate Fair Market Value (determined as of the date the Incentive Stock
Option is granted) of shares of Stock with respect to which Incentive Stock
Options granted to an optionee under this Plan and all other option plans of the
Company, its Parent Corporation or any Subsidiary become exercisable


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for the first time by the optionee during any calendar year exceeds $100,000,
such Stock Options shall be treated as Non-Qualified Stock Options.

SECTION 6.        STOCK APPRECIATION RIGHTS.

         (1)      Grant and Exercise. Stock Appreciation Rights may be granted
either alone ("Free Standing Rights") or in conjunction with all or part of any
Stock Option granted under the Plan ("Related Rights"). In the case of a
Non-Qualified Stock Option, Related Rights may be granted either at or after the
time of the grant of such Stock Option. In the case of an Incentive Stock
Option, Related Rights may be granted only at the time of the grant of the
Incentive Stock Option.

         A Related Right or applicable portion thereof granted in conjunction
with a given Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option, except that, unless
otherwise provided by the Administrator at the time of grant, a Related Right
granted with respect to less than the full number of shares covered by a related
Stock Option shall only be reduced if and to the extent that the number of
shares covered by the exercise or termination of the related Stock Option
exceeds the number of shares not covered by the Stock Appreciation Right.

         A Related Right may be exercised by an optionee, in accordance with
paragraph (2) of this Section 6, by surrendering the applicable portion of the
related Stock Option. Upon such exercise and surrender, the optionee shall be
entitled to receive an amount determined in the manner prescribed in paragraph
(2) of this Section 6. Stock Options which have been so surrendered, in whole or
in part, shall no longer be exercisable to the extent the Related Rights have
been so exercised.

         (2)      Terms and Conditions. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with the provisions of
the Plan, as shall be determined from time to time by the Administrator,
including the following:

                  (a)  Stock Appreciation Rights that are Related Rights
("Related Stock Appreciation Rights") shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of Section 5 and this Section 6;
provided, however, that no Related Stock Appreciation Right shall be exercisable
during the first six months of its term, except that this additional limitation
shall not apply in the event of death or Disability of the optionee prior to the
expiration of such six-month period.

                  (b)  Upon the exercise of a Related Stock Appreciation Right,
an optionee shall be entitled to receive up to, but not more than, an amount in
cash or that number of shares of Stock (or in some combination of cash and
shares of Stock) equal in value to the excess of the Fair Market Value of one
share of Stock as of the date of exercise over the option price per share
specified in the related Stock Option multiplied by the number of shares of
Stock in respect of which the Related Stock Appreciation Right is being
exercised, with the Administrator having the right to determine the form of
payment.

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                  (c)  Related Stock Appreciation Rights shall be transferable
or exercisable only when and to the extent that the underlying Stock Option
would be transferable or exercisable under paragraph (5) of Section 5.

                  (d)  Upon the exercise of a Related Stock Appreciation Right,
the Stock Option or part thereof to which such Related Stock Appreciation Right
is related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 on the number of shares of Stock to be issued
under the Plan.

                  (e)  A Related Stock Appreciation Right granted in connection
with an Incentive Stock Option may be exercised only if and when the Fair Market
Value of the Stock subject to the Incentive Stock Option exceeds the exercise
price of such Stock Option.

                  (f)  Stock Appreciation Rights that are Free Standing Rights
("Free Standing Stock Appreciation Rights") shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant; provided, however, that no Free Standing Stock
Appreciation Right shall be exercisable during the first six months of its term,
except that this limitation shall not apply in the event of death or Disability
of the recipient of the Free Standing Stock Appreciation Right prior to the
expiration of such six-month period.

                  (g)  The term of each Free Standing Stock Appreciation Right
shall be fixed by the Administrator, but no Free Standing Stock Appreciation
Right shall be exercisable more than ten years after the date such right is
granted.

                  (h)  Upon the exercise of a Free Standing Stock Appreciation
Right, a recipient shall be entitled to receive up to, but not more than, an
amount in cash or that number of shares of Stock (or any combination of cash or
shares of Stock) equal in value to the excess of the Fair Market Value of one
share of Stock as of the date of exercise over the price per share specified in
the Free Standing Stock Appreciation Right (which price shall be no less than
100% of the Fair Market Value of the Stock on the date of grant) multiplied by
the number of shares of Stock with respect to which the right is being
exercised, with the Administrator having the right to determine the form of
payment.

                  (i)  Free Standing Stock Appreciation Rights shall be
transferable or exercisable subject to the provisions governing the
transferability and exercisability of Stock Options set forth in paragraphs (3)
and (5) of Section 5.

                  (j) In the event of the termination of an employee who has
been granted one or more Free Standing Stock Appreciation Rights, such rights
shall be exercisable to the same extent that a Stock Option would have been
exercisable in the event of the termination of the optionee.

                  (k) For the purpose of the limitation set forth in Section 3
on the number of shares to be issued under the Plan, the grant or exercise of
Free Standing Stock Appreciation Rights shall be deemed to constitute the grant
or exercise, respectively, of Stock Options with respect to the number of shares
of Stock with respect to which such Free Standing Stock Appreciation Rights were
so granted or exercised.

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SECTION 7.        RESTRICTED STOCK, DEFERRED STOCK, AND PERFORMANCE SHARES.

         (1)      General. Restricted Stock, Deferred Stock, or Performance
Share awards may be issued either alone or in addition to other awards granted
under the Plan. The Administrator shall determine the Participants to whom, and
the time or times at which, grants of Restricted Stock, Deferred Stock, or
Performance Share awards shall be made; the number of shares to be awarded; the
price, if any, to be paid by the recipient of Restricted Stock, Deferred Stock,
or Performance Share awards; the Restricted Period (as defined in Section 7(3))
applicable to Restricted Stock, Deferred Stock, or Performance Share awards; the
performance objectives applicable to Performance Share, Restricted Stock, or
Deferred Stock awards; the date or dates on which restrictions applicable to
such Restricted Stock or Deferred Stock awards shall lapse during such
Restricted Period; and all other conditions of the Restricted Stock, Deferred
Stock, and Performance Share awards. The Administrator may also condition the
grant of Restricted Stock, Deferred Stock, or Performance Share awards upon the
exercise of Stock Options or upon such other criteria as the Administrator may
determine, in its sole discretion. The provisions of Restricted Stock, Deferred
Stock or Performance Share awards need not be the same with respect to each
recipient.

         (2)      Awards and Certificates. The prospective recipient of a
Restricted Stock, Deferred Stock, or Performance Share award shall not have any
rights with respect to such award, unless and until such recipient has executed
an agreement evidencing the award (a "Restricted Stock Award Agreement,"
"Deferred Stock Award Agreement," or "Performance Share Award Agreement," as
appropriate) and delivered a fully executed copy thereof to the Company, within
a period of sixty days (or such other period as the Administrator may specify)
after the award date. Except as otherwise provided below in this Section 7(2),
(i) each Participant who is awarded Restricted Stock or Performance Shares shall
be issued a stock certificate in respect of such shares of Restricted Stock or
Performance Shares; and (ii) such certificate shall be registered in the name of
the Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, substantially in the
following form:

                  "The transferability of this certificate and the shares of
         stock represented hereby are subject to the terms and conditions
         (including forfeiture) of the 2002 Redwood Trust, Inc. Incentive Stock
         Plan and a Restricted Stock Award Agreement or Performance Share Award
         Agreement entered into between the registered owner and Redwood Trust,
         Inc. Copies of such Plan and Agreement are on file in the offices of
         Redwood Trust, Inc."

         The Company shall require that the stock certificates evidencing such
shares be held in the custody of the Company until the restrictions thereon
shall have lapsed, and that, as a condition of any Restricted Stock award or
Performance Share award, the Participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such award.

         (3)      Restrictions and Conditions. The Restricted Stock, Deferred
Stock, and Performance Share awards granted pursuant to this Section 7 shall be
subject to the following restrictions and conditions:

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                  (a)  Subject to the provisions of the Plan and the Restricted
Stock, Deferred Stock, or Performance Share award agreement, during such period
as may be set by the Administrator commencing on the grant date (the "Restricted
Period"), the Participant shall not be permitted to sell, transfer, pledge, or
assign shares of Restricted Stock, Performance Shares, or Deferred Stock awarded
under the Plan; provided, however, that the Administrator may, in its sole
discretion, provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions in whole or in part based on such factors
and such circumstances as the Administrator may determine, in its sole
discretion, including, but not limited to, the attainment of certain performance
related goals, the Participant's termination, death, or Disability or the
occurrence of a "Change of Control" (as defined by the Administrator at the time
of grant). Except for certain limited situations, the Restricted Period for
awards subject solely to continued employment restrictions shall be not less
than three years from the date of grant. The Restricted Period for awards
subject to meeting specified performance criteria shall generally not be shorter
than twelve months or longer than five years.

                  (b)  Except as provided in paragraph (3)(a) of this Section 7,
the Participant shall have, with respect to the shares of Restricted Stock or
Performance Shares, all of the rights of a stockholder of the Company, including
the right to vote the shares, and the right to receive any dividends thereon
during the Restricted Period. With respect to Deferred Stock awards, the
Participant shall generally not have the rights of a stockholder of the Company,
including the right to vote the shares during the Restricted Period; provided,
however, that, except as otherwise specified by the Administrator at time of
grant, dividends declared during the Restricted Period with respect to the
number of shares covered by a Deferred Stock award shall accrue to the
Participant. Certificates for shares of unrestricted Stock shall be delivered to
the Participant promptly after, and only after, the Restricted Period shall
expire without forfeiture in respect of such shares covered by the award of
Restricted Stock, Performance Shares, or Deferred Stock, except as the
Administrator, in its sole discretion, shall otherwise determine.

SECTION 8.        AMENDMENT AND TERMINATION.

         The Board may amend, alter, suspend, terminate, or discontinue the Plan
or any portion thereof at any time; provided, however, that no such amendment,
alteration, suspension, discontinuation, or termination shall be made without
(1) stockholder approval if such approval is necessary to qualify for or comply
with any tax or regulatory requirement for which or with which the Board deems
it necessary or desirable to qualify or comply or (2) the consent of the
affected Participant, if such action would impair the rights of such Participant
under any outstanding award. Notwithstanding anything to the contrary herein,
the Committee may amend the Plan in such manner as may be necessary so as to
have the Plan conform to local rules and regulations in any jurisdiction outside
the United States.

         The Administrator may amend the terms of any award theretofore granted
prospectively or retroactively, but no such amendment shall (1) impair the
rights of any Participant without his or her consent or (2) except for
adjustments made pursuant to Section 3(5) or in connection with substitute
awards, reduce the exercise price of outstanding Stock Options or Stock
Appreciation Rights or cancel or amend outstanding Stock Options or Stock
Appreciation Rights with an exercise price that is less than the exercise price
of the original Stock Options or Stock Appreciation Rights without stockholder
approval. Any change or adjustment to an outstanding Incentive Stock Option
shall not, without the consent of the Participant, be made in a manner so


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as to constitute a "modification" that would cause such Incentive Stock Option
to fail to continue to qualify as an Incentive Stock Option. Notwithstanding the
foregoing, any adjustments made pursuant to Section 3(5) shall not be subject to
these restrictions.

SECTION 9.        UNFUNDED STATUS OF PLAN.

         The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant or
optionee by the Company, nothing contained herein shall give any such
Participant or optionee any rights that are greater than those of a general
creditor of the Company.

SECTION 10.       GENERAL PROVISIONS.

         (1)      The Administrator may require each person purchasing shares
pursuant to a Stock Option to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to distribution thereof.
The certificates for such shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.

         All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Stock is then
listed, and any applicable federal or state securities law, and the
Administrator may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.

         (2)      Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of the
Plan shall not confer upon any employee of the Company or any Subsidiary any
right to continued employment with the Company or a Subsidiary, as the case may
be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.

         (3)      Each Participant shall, no later than the date as of which the
value of an award first becomes includable in the gross income of the
Participant for federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Administrator regarding payment of, any
federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on the making of such payments or arrangements, and the Company
(and, where applicable, its Subsidiaries) shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Participant.

         (4)      No member of the Board or the Administrator, nor any officer
or employee of the Company acting on behalf of the Board or the Administrator,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board or the Administrator and each and any officer or employee of the Company
acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.

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         (5)      The Administrator may permit or require a Participant to
subject any award granted hereunder to any deferred compensation, deferred stock
issuance, or similar plan that may be made available to Participants by the
Company from time to time. The Administrator may establish such rules and
procedures for participation in such deferral plans as it may deem appropriate,
in its sole discretion.

SECTION 11.       EFFECTIVE DATE OF PLAN.

         The Plan became effective (the "Effective Date") on May 9, 2002, the
date the Company's stockholders formally approved the Plan.

SECTION 12.       TERM OF PLAN.

         The Plan shall remain in full force and effect unless terminated by the
Board or no further shares of Stock remain available for awards to be granted
under Section 3 and there are no outstanding awards that remain to become
vested, exercised, or free of restrictions.

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