8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

February 8, 2006

Date of Report (Date of earliest event reported)

NOVASTAR FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Maryland	001-13533	74-2830661
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

8140 Ward Parkway, Suite 300, Kansas City, MO 64114

(Address of principal executive offices)

(Zip Code)

(816) 237-7000

(Registrant’s telephone number, including area code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

INFORMATION TO BE INCLUDED IN THE REPORT

Item 1.01 – Entry into a Material Definitive Agreement

On February 8, 2006, the Compensation Committee of the Board of Directors of NovaStar Financial, Inc. (“the Company”) approved the NovaStar Long Term Incentive Plan (“the Plan”), which outlines long-term stock-based incentive compensation awards for certain key employees of the Company. The Plan provides for stock-based awards in the form of non-qualified stock options and time-vested restricted stock. A copy of the Long Term Incentive Plan is included as Exhibit 10.34 and is incorporated herein by reference.

Item 5.05 – Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics

On February 8, 2006, the Board of Directors of the Company approved amendments to the Company’s Code of Conduct. The amendments consisted of certain technical amendments as well as the addition of the section titled “Responsibility for Disclosure” which outlines additional policies to which the CEO, President and Senior Financial Officers must adhere. A copy of the Company’s Code of Conduct is included as Exhibit 14.1 and is incorporated herein by reference.

References to the registrant’s website in the NovaStar Financial, Inc. Code of Ethics do not incorporate by reference the information on the registrant’s website into this Current Report and the registrant disclaims any such incorporation by reference.

Item 7.01 – Other Events

On February 13, 2006, the Company announced its first quarter 2006 Preferred stock dividend of $.55625 per share, to shareholders of 8.90% Class C Cumulative Redeemable Preferred Stock of record as of March 1, 2006 payable on March 31, 2006. A copy of the press release is included as Exhibit 99 and is incorporated herein by reference.

Item 9.01 – Financial Statements and Exhibits

(c) Exhibits

10.34 NovaStar Long Term Incentive Plan

14.1 NovaStar Financial, Inc. Code of Conduct

99 NovaStar Announces Preferred Dividend

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NOVASTAR FINANCIAL, INC.

DATE: February 14, 2006	/s/ Gregory S. Metz
	Gregory S. Metz

Chief Financial Officer

Exhibit Index

Exhibit

Number

10.34 NovaStar Long Term Incentive Plan

14.1 NovaStar Financial, Inc. Code of Conduct

99 NovaStar Announces Preferred Dividend

EX-10

NOVASTAR LONG TERM INCENTIVE PLAN

Effective as of January 1, 2006

Purpose

The purpose of the NovaStar Employee Long Term Incentive Plan (the “Plan”) is to maximize the Company’s performance over the long term by aligning the interest of the Company’s stockholders with incentive compensation payable to eligible key employees. The Plan accomplishes this purpose by:

• Aligning a key employee’s long-term compensation opportunity with the value of NovaStar stock. A key employee’s award potential will increase as share value rises.

• Ensuring a key employee’s long-term compensation is competitive with the marketplace.

• Attracting, retaining and motivating qualified individuals.

• Aligning key employee compensation with the business metrics that drive shareholder value.

NovaStar Compensation Philosophy

NovaStar believes that incentive pay should be structured to:

• Help attract and retain qualified motivated individuals who will provide the leadership required to achieve our strategic goals, which includes sustaining long-term value-based growth for our stockholders.

• Link management’s compensation to NovaStar’s profitability and stock price.

• Encourage stock ownership among management and all employee levels. A significant percentage of total key employee compensation should be provided through incentive equity compensation that aligns management’s interest with the Company’s stockholders.

• Make a key employee’s personal net worth dependent on appreciation in the value of NovaStar stock over the long-term.

Eligibility

Individuals eligible for awards under the Plan include employees with titles of vice president and above. Upon the recommendation of the CEO and other executive staff, the Compensation Committee may expand eligibility under the Plan to other key employees.

Required Employment

To receive a stock award, an employee must be employed by NovaStar on the date the stock award is granted, except as otherwise required by applicable law.

Stock-Based Incentive Awards

Long term incentive awards normally will consist of stock options and time-vested restricted stock awards. The Compensation Committee may also grant stock awards for those years in which NovaStar’s

performance is extraordinary or for other business purposes (including, for example, to address unique employee retention issues).

All such stock-based awards will be issued pursuant to the terms of the NovaStar Financial, Inc. 2004 Incentive Stock Plan and an award agreement granted thereunder. The Compensation Committee will determine each year:

• The number of shares to be awarded to each key employee;

• The type of awards granted (e.g., stock options, restricted stock, etc.) ; and

• Any performance or other conditions and limitations that may apply with respect to such awards.

The following table summarizes the types of awards normally granted under the Plan. The actual type and form of award for any given year may be different than shown below.

NovaStar Long Term Incentive Plan
Feature	Non-qualified Stock Options	Time-vested Restricted Stock
Objective	•  Help drive stock value •  Provide ongoing source of earnings based on share value	•  Help retain key employees for long term • Link long-term performance to share value
% of Your Total Award	Determined annually by the Compensation Committee (normally targeted at 50% of total stock award)	Determined annually by the Compensation Committee (normally targeted at 50% of total stock award)
When Shares Are Granted and How Many	•  Annually •  Number of stock options will be determined by the Compensation Committee	•  Annually •  Number of restricted shares will be determined by the Compensation Committee
Vesting – When You Own Your Shares	•  Stock options vest (i.e., may be exercised) at a rate of 25% each year •  100% vested after four years	•  The restricted shares vest after 5 years from the date of grant •  If an employee terminates employment before the shares are vested, the shares will be forfeited
Dividends (and Dividend Equivalents)	•  Dividend equivalents (DERs) will be paid at the same time dividends are paid to shareholders	•  Dividends on restricted shares will be paid at the same time dividends are paid to shareholders

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Exercising Your Right to Buy Shares	•  Employees may exercise their stock options after they become vested •  The “strike price” will be determined at the date of grant but may not be less than 100% of the fair market value on the date of grant •  Options may be exercised for up to 10 years following date of grant	The restricted shares will be subject to a risk of forfeiture until the employee’s vesting date
Selling Your Shares	Subject to the Company’s trading policies, option shares may be sold at any time once they are exercised	Subject to the Company’s trading policies, shares may be sold at any time once they are vested
Taxation	Subject to income taxes in the year in which the stock option is exercised	Subject to income taxes during the year the restricted shares become vested (unless a deferral election is timely made)
Deferral of Awards	Stock options gains may not be deferred	•  An employee may elect to defer taxation of his restricted stock awards by making a deferral election at least 12 months in advance of the scheduled vesting date •  The employee must designate a “payment date” that is at least 5 years after the date the restricted shares would have vested absent a deferral election •  Unrestricted shares will be delivered to the employee upon the elected “payment date” or, if earlier, termination of employment due to death, disability or a change in control
Voting Rights	Employee does not have voting rights until the option is exercised	Employee has voting rights once the restricted shares are granted.

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Performance Criteria

With respect to performance-based stock awards, the performance measures that may be used by the Compensation Committee for such awards shall be based on any one or more of the following, as selected by the Compensation Committee: 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” within the meaning of Section 162(m) of the Internal Revenue Code, 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 Section 162(m).

About the Federal Income Tax Consequences to Employees

The following is a brief summary of the principal U.S. federal income tax consequences, based on current federal income tax laws, of the issuance and exercise of awards under the Plan. This summary is not intended to be exhaustive and does not describe state, local, or foreign tax consequences. Each employee is strongly urged to consult their tax advisors regarding the federal, state, local or other tax consequences of the receipt awards.

Non-Qualified Options (NQSO). No taxable income will be recognized by an employee upon the grant of an NQSO. Upon exercise, however, the employee will generally recognize ordinary income (that will be included on the employee’s W-2) in an amount equal to the difference between the exercise price and the fair market value of the shares on the date of exercise. The employee will have a basis in such stock in an amount equal to such fair market value. If the exercise price of a NQSO is paid by the employee tendering existing, unrestricted shares of Company common stock, such tender should be treated as a deemed surrender of the existing shares in exchange for an equivalent number of new shares of Company common stock. Upon such deemed exchange, the employee should not recognize gain or loss on the shares deemed surrendered but will recognize ordinary income on the amount by which the value of the new shares received exceeds the value of the existing shares tendered in exchange. If the employee of a NQSO pays the exercise price by surrendering other NQSOs, the employee will have ordinary income in the amount of the total value of the new shares received. The employee will take a basis in any new shares received on exercise of a NQSO equal to the fair market value of such shares on the date of exercise.

Upon subsequent sale of any shares of common stock acquired pursuant to the exercise of a NQSO, an employee will have capital gain or loss equal to the difference between the amount realized upon such sale and the employee’s adjusted tax basis in the shares of common stock. Such gain or loss will be capital gain or loss and will be long term if the shares of common stock have been held for more than one year form the date the option is exercised.

Dividend Equivalent Rights (DERs). No taxable income will be recognized by an employee upon the grant of a DER. Rather, such income will be recognized when the employee receives cash or other property, if any, pursuant to such DER. Such income will be subject to tax at ordinary income rates and will be included in their W-2 for the year in which the payment is received. It should be noted that

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payments made under DERs are considered compensation income and not dividends for tax purposes, and are not eligible for the lower tax rate on qualifying dividend income.

Restricted Stock Awards. No taxable income will be recognized by an employee for restricted stock awards until the taxable year in which the common stock that is the subject of such grant becomes transferable or is no longer subject to forfeiture (the “vesting date”). At such time, the employee will realize income equal to the then fair market value of the stock on the vesting date of the shares received pursuant to such grant. Any such income will be subject to tax at ordinary income rates and such income will be included in an employee’s W-2 in the year the restricted stock vests.

Alternatively, an employee may elect under Section 83(b) of the Code within 30 days of the date of receipt of such restricted stock grant to treat such grant as fully vested on the grant date. If a Section 83(b) election is made, the employee will include in income on the date of such grant an amount equal to the fair market value of the common stock received. There are significant tax issues and risks associated with making a Section 83(b) election and we strongly urge each employee to seek advice from their personal tax advisor before making such election.

An employee generally will have a tax basis in any shares of common stock received that is equal to the amount, if any, included in income as described above. If shares are then sold after the vesting date, the holding period to determine whether the employee has long-term or short-term capital gain or loss begins with the vesting date, unless the employee has made a Section 83(b) election, in which case such employee’s holding period begins on the original date of the restricted stock grant.

Dividend payments received on restricted stock that has not yet vested are taxable as ordinary income in the year received and will be subject to withholding taxes and included in the employee’s W-2 for that year.

Additional Welfare Benefits

In addition to stock-based awards, key employees may be eligible for supplemental executive life insurance (three times annual base), supplemental disability (maximum of $16,500 per month), executive financial planning ($5,000 annual benefit), and executive physicals.

Amendment or Termination

The Plan may be modified or terminated at any time by the Compensation Committee. This document does not provide a guarantee of participation or pay-out. Furthermore, this document does not establish a contract of employment between the Company and any employee, nor does it establish a guarantee of employment for any specific period of time.

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EX-14

NOVASTAR FINANCIAL, INC.

Code of Conduct

Overview

To keep the confidence and trust of our investors, customers and the general public, each of us must approach our work with integrity and an unwavering determination to act in accordance with the law and the highest standards of ethical conduct and fair dealing in all situations. This Code of Conduct outlines NovaStar’s commitment to the highest degree of ethical business standards.

As a condition of employment, each director, officer and employee is expected to comply with this Code of Conduct and will be held accountable if he or she fails to do so. Any violation of this Code, or any conduct that violates any law, rule, regulation, or ethical or professional norm, is subject to disciplinary action, up to and including termination of employment. Directors, officers and employees are also expected to cooperate fully with any Company audits or investigations and to answer all questions fully and truthfully. It is a violation of Company policy to intimidate or impose any other form of retaliation on any director or employee who, in good faith, reports any actual or suspected legal, ethical, or policy violation.

This Code provides the standards of conduct that guide all directors, officers and employees of NovaStar. All of our directors, officers and employees must conduct themselves appropriately and seek to avoid even the appearance of improper behavior.

Conflicts of Interest and Corporate Opportunities

You are expected to devote your best efforts to the performance of your job at NovaStar. You are expected to use good judgment, to adhere to high ethical standards, and to avoid situations that create an actual or potential conflict between your personal interests and the interests of NovaStar. A conflict of interest exists when your loyalties or actions are divided between the Company’s interests and those of another such as a competitor, supplier, customer or family member. Both the fact and the appearance of a conflict of interest should be avoided. If you are uncertain as to whether a certain activity, transaction, or relationship constitutes a conflict of interest, you should discuss it with your immediate supervisor, Human Resources Management or the company legal counsel for clarification.

This policy does not attempt to describe all possible conflicts of interest that could develop. Some of the more common conflicts from which you should refrain, however, include the following:

1. Accepting personal gifts or entertainment from competitors, customers, suppliers, or potential suppliers that would be perceived as being improper or as compromising to your integrity or the integrity of NovaStar.

2. Working for a competitor, supplier or customer;

3. Engaging in self-employment in competition with the Company;

4. Engaging in business in competition with the Company with a family member or “significant other”

5. Using proprietary or confidential information for personal gain or to the Company’s detriment;

6. Having direct or indirect financial interest in another company, other than as a less-than 5% holder of that company’s publicly traded stock;

7. Using Company assets or labor for personal use;

8. Acquiring any interest in property or assets of any kind for the purpose of selling or leasing it to the Company for personal benefit that would be detrimental to the Company or its shareholders;

9. Committing the Company to give its financial or other support to any unauthorized outside activity or organization; and

10. Obtaining a personal loan or a guaranty of a personal obligation from the Company for a director, officer, employee or one of your family members, except for certain loans authorized by Section 13 of the Securities Exchange Act of 1934, and in accordance with the Company’s policy on personal loans.

You should be aware that if you enter into a personal relationship with a subordinate employee or with an employee of a competitor, supplier, or customer, a potential conflict of interest exists that requires full written disclosure to the Company.

Gifts

Should any question arise in your mind about the nature or appropriateness of any gift the gift should be respectfully declined. If a third party would perceive the gift as being improper or as compromising to your integrity or the integrity of NovaStar, the gift should be respectfully declined. Any questions about whether or not to accept a gift should be reviewed with your manager.

You are prohibited (by law) to ask for, receive or agree to receive “anything of value,” for himself or herself or a family member, in connection with any transaction or business of NovaStar. Gifts of cash and/or monetary equivalents are specifically prohibited. Company sponsored rewards and incentive programs are explicitly excluded from this policy.

Outside Employment

You may hold an outside job as long as you meet the performance standards of your job with the Company. However, if you fail to meet your performance standards, you will be subject to disciplinary action, up to and including termination of your employment with NovaStar. You should consider the impact outside employment might have on your health and physical well being.

As discussed more fully in the Conflict of Interest Policy above, outside employment that constitutes a conflict of interest is strictly prohibited. You may not receive any income or material gain from individuals outside the Company for material produced or services rendered while performing your job within the Company. If you hold a managerial position, you should disclose any outside employment, including consulting relationships, and obtain prior approval from the President or Chief Executive Officer.

Confidentiality

You may be entrusted with important information about the Company’s and/or its clients’ financial condition, results of operations, competitive position, future plans or other related information which has not been made public. It is essential that the business and internal affairs of the Company and its clients be kept confidential. Company property includes not only tangible property, like desks and computers, but also intangible property such as information. Of particular importance is proprietary information and confidential information. Proprietary information includes all information obtained by you in the course of your work. Confidential information is any Company information that is not generally known to the public or the industry. Information about the Company’s plans, products, and systems is considered both proprietary, confidential and is among the Company’s most valuable assets.

It is your responsibility to protect NovaStar’s confidential and/or proprietary information from release or misuse. You may not use or disclose any such information for personal gain, nor reveal it to anyone outside the Company at any time during or after your employment with NovaStar, without due legal process or as otherwise required by law. Any breach of security should be promptly reported to the company legal counsel.

Outside Directorships

You must obtain written approval from the President or Chief Executive Officer before accepting a position as a director or trustee in any outside organization, other than in the case of community charitable activities, education institutions or dissimilar family businesses. Individual senior officers must additionally obtain approval from the Board of Directors.

Protection and Proper Use of Company Assets

You have an obligation to protect NovaStar’s assets (e.g. computer equipment and software, intellectual property, etc.) and ensure that those assets are efficiently used. All of NovaStar’s assets must only be used for legitimate business purposes.

Unfair Business Practices

NovaStar's commitment to high ethical standards in its business practices with customers, business partners, suppliers and competitors is reflected in our dedication to candid and forthright communications about our products and services. Unfair and deceptive business practices (e.g., manipulation, concealment, abuse of privileged information, the misrepresentation of material facts, or any other unfair dealing practice) are strictly prohibited.

Compliance with Laws, Rules and Regulations

You are prohibited from taking any action either personally, or on behalf of the Company, that will violate any law or regulation or internal policy.

Credit

You shall not make any unlawful preferential extension of credit to any person, including but not limited to, any employee, customer, director or principle shareholder of any customer or prospective customer.

Furthermore, you shall not obtain unauthorized credit reports using Company equipment.

Bribes

You may not utilize, either directly or indirectly, company funds or NovaStar property for any unlawful or improper use. No bribes or kickbacks shall be given or accepted by you to obtain or retain business; seek preferential treatment; or any other improper activity.

Insider Trading

The stock of NovaStar Financial Corporation is publicly held and traded on the New York Stock Exchange. In order to ensure that all investors have equal opportunity and fair advantage to make investment decisions, all NovaStar directors, officers and employees are subject to federal "insider trading" laws that prohibit them from buying or selling stock with advance knowledge of important company information that is unavailable to the general public. Such information may include proposed mergers or acquisitions, earnings predictions or changes in predicted earnings, new equity or debt offerings, unreleased production numbers and new product information. NovaStar directors, officers and employees are also prohibited from disclosing "inside information" to others who may use the information to trade company stock.

NovaStar's policies with respect to "insider trading" are also strictly enforced in reference to business partner information as to which NovaStar directors, officers and employees may have advance knowledge. Policies and procedures regarding insider trading have been approved by the Board and provide additional guidance to all NovaStar directors, officers and employees. If you have questions of concerns regarding this policy please contact company legal counsel for clarification.

Seeking Guidance

If you are unsure of what to do in a particular situation or you question whether a situation could be a violation of Company ethical policies or otherwise be improper then you should seek guidance before you act. Guidance can be obtained from your manager, or if you feel that it is not appropriate to discuss this matter with your manager, then you should contact your local Human Resources Manager. If you seek an interpretation or clarification of the policies and procedures noted above, please contact company legal counsel directly for clarification.

Reporting

If you become aware of any employee, officer or director who may be in violation of this Code, or otherwise is involved in any illegal, unethical or improper action then you should report this information to an appropriate person. In most cases this is your manager, but if the situation involves your manager, or you would prefer to report this information anonymously, you may call the Company’s Ethics Hotline (1-800-591-1137). Any member of management who becomes aware of a violation of this Code, or any illegal unethical or improper action by one their employees is required to report this information to the Director of Internal Audit Services.

If your report concerns accounting, internal accounting controls or auditing matters you should report this by calling the Company’s Ethics Hotline (1-800-591-1137), in which case it will be brought to the attention of the Audit Committee of the Board of Directors. You may also submit a report online from the Corporate Governance section of the Company’s website. Your report may be made confidentially and anonymously.

We also provide the means to confidentially and anonymously report concerns about accounting, internal accounting controls or auditing matters in writing by reporting these concerns to the Director of Internal Audit who shall promptly deliver such report to the Audit Committee of the Board of Directors. The Audit Committee may also be contacted by U.S. mail at the following address:

The Audit Committee of the Board of Directors

NovaStar Financial, Inc.

8140 Ward Parkway, Suite 300

Kansas City, MO 64114

IT IS A VIOLATION OF COMPANY POLICY TO INTIMIDATE OR IMPOSE ANY OTHER FORM OF RETALIATION ON ANY EMPLOYEE WHO, IN GOOD FAITH, LAWFULLY OR TRUTHFULLY REPORTS ANY ACTUAL OR SUSPECTED LEGAL, ETHICAL OR POLICY VIOLATION.

Investigations

All reports received will be investigated and appropriate action will be taken. Depending on the circumstances, reports may be forwarded to the President or Chief Executive Officer, the Board of Directors or the Audit Committee of the Board. We will try and maintain the anonymity and confidentiality of reports and those providing such reports. We cannot guarantee, however, the eventual anonymity or confidentiality of any such report in the event that an effective investigation requires otherwise.

Waivers From the Code

While some of our policies must be strictly adhered to and no waivers or exceptions can be allowed, in other cases, they may be possible. For example, a minor conflict of interest may be resolved simply by disclosure of the conflict to all interested parties. If you believe that a waiver, exception or modification to any of our policies is appropriate in your case, you should contact your manager. If your manager agrees that that an exception is appropriate, the waiver, exception or modification must be forwarded through Human Resources to the President or Chief Executive Officer for approval. The Human Resources department is responsible for maintaining a record of all requests for waivers, exceptions and the disposition of these requests.

No waiver or exception of compliance with this Code by a Section 16 Officer or a Director of the Company shall be considered or granted except as provided by the Board of Directors. Any such amendments to or waivers from this Code that are granted by the Board shall be promptly disclosed to shareholders.

Disciplinary Action

Any violation of this Code, or any conduct that violates any law, rule, regulation, or ethical or professional norm, is subject to disciplinary action, up to and including termination of employment. You are also expected to cooperate fully with any Company audits or investigations and to answer all questions fully and truthfully.

Administration of This Code

A committee consisting of the Company’s Legal Counsel, Human Resources, the Internal Audit Department, and others as the Chief Executive Officer may direct, shall meet at least annually to review the administration of this Code, and recommend to the President or Chief Executive Officer any amendments that may be necessary to assure its continued effectiveness, communication and enforcement. Any amendments, following approval by the Board of Directors, shall be communicated to all employees, officers and directors. The most updated version of this Code can be found in the Corporate Governance section of the Company website.

Responsibility for Disclosure.

While NovaStar’s CEO, President and all senior financial officers, including the CFO and principal accounting officer, are bound by all of the provisions of this Code of Conduct, the CEO, the President and the senior financial officers are subject to the following additional specific policies:

1.         The CEO, the President and all senior financial officers are responsible for full, fair, accurate, timely and understandable disclosure in reports and documents that NovaStar files with, or submits to, the SEC and in other public communications made by NovaStar. Accordingly, it is the responsibility of the CEO, the President and each senior financial officer promptly to bring to the attention of the Disclosure Committee any material information of which he or she may become aware that affects the disclosures made by NovaStar in its public filings or communications and otherwise assist the Disclosure Committee in fulfilling its responsibilities.

2.         The CEO, the President and each senior financial officer must promptly bring to the attention of the Disclosure Committee and the Audit Committee any information he or she may have concerning (a) significant deficiencies or material weaknesses in the design or operation of internal controls which could adversely affect NovaStar’s ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in NovaStar’s financial reporting, disclosures or internal controls.

EX-99

NOVASTAR ANNOUNCES PREFERRED DIVIDEND

KANSAS CITY, MO., February 13, 2006 – NovaStar Financial, Inc. (NYSE: NFI), a residential mortgage lender and portfolio investor, announced its first quarter, 2006 Preferred dividend.

At its recent meeting, the Board of Directors declared a quarterly dividend of $.55625 per share, to shareholders of 8.90% Class C Cumulative Redeemable Preferred Stock of record as of March 1, 2006 payable on March 31, 2006.

About NovaStar

NovaStar Financial, Inc. (NYSE: NFI) is one of the nation’s leading lenders and investors in residential mortgages. The company specializes in single-family, nonconforming mortgages, involving borrowers whose loan size, credit details or other circumstances fall outside conventional mortgage agency guidelines. A Real Estate Investment Trust (REIT) founded in 1996, NovaStar efficiently brings together the capital markets, a nationwide network of mortgage brokers and American families financing their homes. NovaStar is headquartered in Kansas City, Missouri, and has lending operations nationwide.

For more information, please reference our website at www.novastarmortgage.com.

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Investor Relations Contact

Jeffrey A. Gentle

816.237.7424