Exhibit
10.1

     

    2002  REDWOOD
TRUST, INC. INCENTIVE PLAN

    (as amended on May 18,
2010)

     

    Section
1. General Purpose of Plan; Definitions.

     

    The name
of this plan is the 2002 Redwood Trust, Inc. Incentive Plan (the “Plan”). The
Plan (then known as the 2002 Redwood Trust, Inc. Incentive Stock 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 (i) on
March 4, 2004 (the “2004 Amendments”) which were approved by the Company’s
stockholders on May 6, 2004, (ii) on March 9, 2006 (the “2006 Amendments”) which
were approved by the Company’s stockholders on May 11, 2006, (iii) on March 5,
2008 (the “2008 Amendments”) which were approved by the Company’s stockholders
on May 22, 2008 and (iv) on March 17, 2010 (the “2010 Amendments”), if approved
by the Company’s stockholders on May 18, 2010. In addition, pursuant to the
authorization contained in Section 11(6), the Board approved amendments to the
Plan on November 10, 2007 (the “409A Amendments”).

     

    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.

     

    (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: (i)
a determination by the Social Security Administration that a Participant is
totally disabled; (ii) a determination that the Participant is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than 12 months; or (iii)
the Participant is, by reason of any medically determinable physical or mental
impairment that can be expected to result in death or can be expected to last
for a continuous period of not less than 12 months, receiving income replacement
benefits for a period of not less than 3 months under a disability plan or other
accident and health plan maintained by the Company.

     

    (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.

     

    (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)
“Performance Unit”
means an award of a unit valued by reference to a designated amount of property
(including cash) other than Stock, which value may be paid to the Participant by
delivery of such property as the Committee shall determine, including cash,
Stock, other property, or any combination thereof, upon achievement of such
performance goals as the Committee shall establish.

     

    (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 per share, 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, (f)
Performance Units or (g) 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,
Performance Units 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;

     

    (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 Performance Units);
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,
Performance Units 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 (including
adjusted 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.

     

    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 the 2010 Amendments shall be equal to the sum of:
(i) 1,450,000 shares of Stock; (ii) the number of shares of Stock previously
authorized for awards under the Plan immediately prior to the stockholder
approval of the 2010 Amendments; (iii) any shares of Stock that are represented
by awards granted under the Company’s Amended and Restated 1994 Executive and
Non-Employee Director Stock Option Plan (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 963,637 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.

     

    (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,
Performance Shares, or Performance Units 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 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. The provisions of this Section 5(1)
shall not be applicable to 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 so
long as the ratio of exercise price to fair market value in effect with respect
to such award or obligation before its settlement, assumption or substitution is
maintained after giving effect to such settlement, assumption or
substitution.

     

    (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 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 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 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 twelve
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.

     

    (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 twelve 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 twelve-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.

     

    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 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:

     

    (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. Performance Units.

     

    (1) General.  Performance
Unit 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 Performance Unit awards shall be made; the
number of units to be awarded; the Performance Period (as defined in Section
8(2)) applicable to Performance Unit awards; the performance objectives
applicable to Performance Unit awards, including the performance measures
specified in Section 2 for Performance Unit awards that are intended to be
“performance-based compensation” as that term is used in Section 162(m) of the
Code; and all other conditions of the Performance Unit awards. The Administrator
may also condition the grant of Performance Unit awards upon such other criteria
as the Administrator may determine, in its sole discretion. The provisions of
Performance Unit awards need not be the same with respect to each
recipient.

     

    (2) Performance Period and
Conditions.  The Performance Unit awards granted pursuant to
this Section 8 shall be subject to the following terms and other
conditions:

     

    (a) The
Performance Unit award agreement shall specify such period as may be set by the
Administrator commencing on the grant date (the “Performance Period”) during
which the Performance Unit award shall be earned, based on the attainment of
certain performance related goals and such other factors as the Administrator
may determine, in its sole discretion; provided, however, that the Administrator
may waive such goals and factors in whole or in part under such circumstances as
it may determine in its sole discretion, including 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). The Performance Period for
awards shall generally not be shorter than twelve months or longer than five
years. Notwithstanding anything to the contrary herein, with respect to a
Performance Unit award intended to qualify as performance-based compensation
under Section 162(m) of the Code, the Committee may adjust downwards, but not
upwards, the amount payable under such award. Notwithstanding anything to the
contrary herein, with respect to any Performance Unit award that is intended to
qualify as performance-based compensation under Section 162(m) of the Code, the
Committee shall, prior to payment on such award, certify in writing that the
applicable performance related goals have been met.

     

    (b)
Except as provided in this Section 8 or as may be provided in an award
agreement, Performance Units will be paid only after the end of the relevant
Performance Period. Performance Unit awards may be paid in cash, shares of
stock, other property, or any combination thereof, in the sole discretion of the
Committee at the time of payment. Awards may be paid in a lump sum or in
installments following the close of the Performance Period or, in accordance
with procedures established by the Committee, on a deferred basis subject to the
requirements of Section 409A of the Code.

     

    (3) Maximum Dollar
Value.  The maximum dollar value payable to any Participant in
any 12-month period with respect to a Performance Unit award that is intended to
be performance-based compensation is $5,000,000. If such an award is cancelled,
the cancelled award shall continue to be counted towards such maximum dollar
value.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

       

    

    Section
9. 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 if such approval is required by
the paragraph below 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) without stockholder approval,
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 outstanding Stock Options or Stock
Appreciation Rights in exchange for cash, other Awards or 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. Any change or
adjustment to an outstanding Incentive Stock Option shall not, without the
consent of the Participant, be made in a manner so 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
10. 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
11. 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.

     

    Except as
otherwise expressly stated in the applicable grant or award agreement, if (i) a
Participant is granted Stock Options, Stock Appreciation Rights, Restricted
Stock, Deferred Stock, Performance Units or other awards under this Plan and
such grant or award includes a vesting requirement, a performance requirement or
other condition to unrestricted receipt of the rights granted or awarded (or any
portion thereof) and (ii) such Participant’s service with the Company is
terminated for any reason prior to the satisfaction or lapse of such vesting or
performance condition, then those Stock Options, Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Performance Units or other rights not yet
vested or for which performance or other stated conditions have not yet been
satisfied shall terminate automatically as of the date of termination of service
and shall be forfeited to the Company immediately and without further notice or
obligation on the part of the Company to the Participant.

     

    (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.

     

    (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.

     

    (6) This
Plan is intended to comply and shall be administered in a manner that is
intended to comply with Section 409A of the Code and shall be construed and
interpreted in accordance with such intent. To the extent that an award or the
payment, settlement or deferral thereof is subject to Section 409A of the Code,
the award shall be granted, paid, settled or deferred in a manner that will
comply with Section 409A of the Code, including regulations or other guidance
issued with respect thereto, except as otherwise determined by the Committee.
Any provision of this Plan that would cause the grant of an award or the
payment, settlement or deferral thereof to fail to satisfy Section 409A of the
Code shall be amended to comply with Section 409A of the Code on a timely basis,
which may be made on a retroactive basis, in accordance with regulations and
other guidance issued under Section 409A of the Code.

     

    Section
12. 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. The 2004 Amendments became effective on
May 6, 2004, the date the Company’s stockholders formally approved 2004
Amendments. The 2008 Amendments became effective on May 22, 2008, the date the
Company’s stockholders formally approved the 2008 Amendments. The 2010
Amendments will become effective on May 18, 2010, if the Company’s stockholders
formally approve the 2010 Amendments. The 409A Amendments became effective with
respect to all awards involving income deferrals made after December 31,
2004.

     

    Section
13. 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.