Exhibit 99.1

SUPPLEMENTAL FINANCIAL INFORMATION
QUARTER ENDED SEPTEMBER 30, 2004

This supplemental information package is designed to provide investors with information regarding Redwood Trust that is more detailed than can be found in our quarterly press release or SEC disclosures. If you have suggestions about how we could improve this supplemental financial information package, please call Nicole Klock at 415-380-2321 or email her at [email protected].

NON-GAAP MEASURES

A number of non-GAAP measures are presented in this supplemental information package, including Core Earnings, Core Equity, Core Return on Core Equity, and others. Non-GAAP measures are reconciled to our reported GAAP financials. Information is also provided on taxable income, which is our income as calculated for tax purposes.

GAAP attempts to present economic activity using a common format with a common set of rules for all companies. For this reason, GAAP is an important tool for investors. Each company, however, is different, and there are other measures of economic activity – ones that are more tailored to the individual circumstances of each business – that can also be useful for investors. In this supplement, we try to present a wide variety of information that might be useful to investors.

CORE EARNINGS

Core earnings is defined by Redwood management. We attempt to strip some of the elements out of GAAP that are temporary, one-time, or non-economic in nature or that relate to the past rather than the future, so that the underlying on-going “core” trend of earnings is more clear, at least in certain respects.

To calculate core earnings, we first attempt to adjust for events that are not likely to be repeated. For example, in accordance with GAAP, in the second quarter of 2004 we reported GAAP income of $5.2 million as a one-time recognition of the remaining tax NOLs we expect to benefit from in the future. This GAAP income item will not be repeated, so we excluded it from our core income calculation.

We also exclude realized gains (and losses) from asset sales and calls. We sell assets from time to time as part of our on-going portfolio management activities. These occasional sales can produce material gains and losses that could obscure the underlying trend of our long-term portfolio earnings, so we exclude them from core earnings. Similarly, we exclude gains from calls of residential credit-enhancement securities, as these are essentially sales of assets that produce a highly variable stream of income that may obscure some underlying income generation trends.

GAAP earnings includes mark-to-market income and expenses for certain of our assets and interest rate agreements. These are unrealized market value fluctuations – we exclude them from core earnings. Similarly, we have issued certain stock options that are “variable” and thus are marked-to-market for GAAP. When our stock price goes up, it is a GAAP expense. When our stock price goes down, GAAP income is created. We exclude all this from core earnings.

CORE EQUITY

GAAP equity includes mark-to-market adjustments for certain of our assets and interest rate agreements. This can be useful as a measure that approximates liquidation value (at least for those assets), but for other purposes GAAP equity is less useful, we believe. For instance, return on equity calculated using GAAP equity does not make much sense to us. When our assets that are marked-to-market through our balance sheet equity account appreciate (which is a good thing), our GAAP return on equity goes down because our equity base is larger but these particular mark-to-market gains are not recognized in GAAP income.

Core equity is defined by Redwood management. It is GAAP equity with mark-to-market gains and losses (“accumulated other comprehensive income”) excluded. It is, we believe, a better measure of the amount of capital we have to run our business.

CORE RETURN ON CORE EQUITY

Core return on core equity, or core ROE, is core earnings divided by core equity. This is return on equity with mark-to-market gains and losses and one-time events stripped out.

ADJUSTED CORE EQUITY

We have minimum dividend distribution requirements as a REIT. We thus have future payment obligations, but these are not recognized in GAAP accounting until dividends are declared. Cash that we have earned but that we must pay out as dividends is not cash that will be available to us to acquire long-term assets and build our business. So when we try to answer questions such as “how much equity per share do we have available to build our business and to generate dividends in the long-term?” we use adjusted core equity per share. Adjusted core equity is core equity less undistributed REIT taxable income that is still undeclared but that will need to be paid out.

TAXABLE INCOME

Taxable income is the pre-tax income we earn calculated using calculation methods appropriate for tax purposes. Taxable income differs significantly from GAAP. REIT taxable income is that portion of our taxable income that is subject to REIT tax rules. We must distribute at least 90% of this income as dividends to shareholders over time. As a REIT we are not subject to corporate income taxes on the REIT taxable income we distribute. The remainder of our taxable income (the non-REIT taxable income) is income we earn in taxable subsidiaries. We pay income tax on this income and we generally retain the after-tax income at the subsidiary level.

REDWOOD EARNING ASSETS

Redwood’s real earning assets in an economic sense (real assets that are sitting in our custodial account) totaled approximately $1.1 billion at the end of the third quarter. Included in this amount are securities we have acquired from securitizations we have sponsored with a cost basis of approximately $245 million. All of the $23 billion of assets and asset-backed securities liabilities of the securitization entities we have sponsored are shown on our consolidated GAAP balance sheet, even though we do not own these assets and we are not responsible for the payment of these liabilities. For some analytical tasks (such as determining how much financial leverage Redwood carries on its balance sheet) we believe it makes more sense to consider the assets Redwood actually owns and the debt Redwood actually owes rather than including all GAAP assets and liabilities consolidated from securitization entities that are independent of Redwood.

REDWOOD DEBT

Redwood’s real economic debt — the money we have to pay back to a lender — was $246 million at the end of the third quarter of 2004. Our GAAP balance sheet shows liabilities of $22 billion because all of the assets and liabilities of the independent securitization entities we have sponsored are consolidated.

LEVERAGE RATIOS

Because of the consolidation of independent securitization entities, it appears from our GAAP financial statements that Redwood is highly leveraged, with liabilities greater than twenty-five times equity. In fact, Redwood has $246 million of true debt and $902 million of GAAP equity supporting $1.1 billion of earning assets (as of September 30, 2004). We only use debt to finance on a temporary basis the accumulation of assets prior to sale to a securitization entity. Our permanent investment portfolio, the assets we have acquired or created to own on a long-term basis, is financed entirely with equity capital.

PROFITABILITY RATIOS

Many financial institution analysts use asset-based profitability ratios such as interest rate spread and interest rate margin in their work analyzing financial institutions. Because of our consolidation of securitization entities for GAAP, we believe equity-based profitability ratios are more appropriate for Redwood. Net interest income as a percentage of equity is a useful measure, we believe. For operating expenses, we believe a useful measure is the efficiency ratio, or operating expenses as a percentage of net interest income.

Table 1: GAAP Earnings (all $ in thousands, except per share data)

Table 2: Core Earnings (all $ in thousands, except per share data)

Table 3: GAAP / TAX Differences (all $ in thousands, except per share data)

Table 3
GAAP/TAX Differences
(all $ in thousands, except per share data)

Table 4: Taxable Income Estimates (all $ in thousands, except per share data)

Table 4
Taxable Income Estimates
(all $ in thousands, except per share data)

The estimated taxable income amounts and the associated income tax provision numbers are based on revised taxable income for each of the first three quarters of 2004. The nine month tax provision amounts are consistent with the current provision per the nine month GAAP financials.

Table 5: Retention and Distribution of Taxable Income (all $ in thousands, except per share data)

Table 5
Retention and Distribution of Taxable Income
(all $ in thousands, except per share data)

Table 6: Assets (all $ in millions)

Table 6
Assets
(all $ in millions)

Table 7: Liabilities (all $ in millions)

Table 7
Liabilities
(all $ in millions)