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

December 20, 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 5.02 – Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

On December 20, 2006, NovaStar Financial, Inc. (the “Company”) amended its Employment Agreement dated September 30, 1996 between the Company and Scott F. Hartman; its Employment Agreement dated September 30, 1996 between the Company and W. Lance Anderson; its Employment Agreement dated July 15, 2004 between the Company and Michael L. Bamburg; its Employment Agreement dated July 15, 2004 between the Company and Gregory Metz; and its Employment Agreement dated July 15, 2004 between the Company and Dave Pazgan (collectively the “Original Agreements”).

Each of the amendments to the Original Agreements adds a provision requiring the Company to pay the executive an additional amount equal to any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), if the payments payable upon the executive’s termination after a Change in Control (as defined in the respective Original Agreements) are considered “excess parachute payments” under Section 280G of the Code.

The Original Agreements were also amended to comply with Section 409A of the Code. The amendments provide that in the event of a Change in Control (as defined in the respective Original Agreements), each executive will receive a severance payment in a single lump sum as soon as possible if the Company terminates the executive’s employment other than for “Cause” (as defined in the respective Original Agreements) or six months after the executive’s termination of employment for Good Reason (as defined in the respective Original Agreements). Prior to the amendments, the Original Agreements required 50% of the severance payment to be paid five days after termination and the remaining 50% to be paid in twelve equal monthly installments. The amount of the severance payments that may be due as a result of a Change in Control was not modified and is equal to three times (or two times for Messrs. Bamburg, Metz and Pazgan) the executive’s base salary and his bonus compensation for the preceding year, provided the severance payment will not be less $500,000 (or $360,000 for Mssrs. Hartman and Anderson) nor more than 1% of the Company’s book value.

All the amendments to the Original Agreements are included as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 and are incorporated herein by reference.

Item 9.01 – Financial Statements and Exhibits

(d)	Exhibits
Exhibit Number
10.1	Amendment dated December 20, 2006 to the Employment Agreement dated September 30, 1996 between NovaStar Financial Inc., and W. Lance Anderson.
10.2	Amendment dated December 20, 2006 to the Employment Agreement dated July 15, 2004 between NovaStar Financial Inc., and Michael L. Bamburg.
10.3	Amendment dated December 20, 2006 to the Employment Agreement dated September 30, 1996 between NovaStar Financial Inc., and Scott F. Hartman.
10.4	Amendment dated December 20, 2006 to the Employment Agreement dated July 15, 2004 between NovaStar Financial Inc., and Gregory Metz.
10.5	Amendment dated December 20, 2006 to the Employment Agreement dated July 15, 2004 between NovaStar Mortgage Inc., and Dave Pazgan.

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: December 20, 2006		/s/ Gregory S. Metz
		Gregory S. Metz
		Chief Financial Officer

Exhibit Index

Exhibit

Number

10.1	Amendment dated December 20, 2006 to the Employment Agreement dated September 30, 1996 between NovaStar Financial Inc., and W. Lance Anderson.
10.2	Amendment dated December 20, 2006 to the Employment Agreement dated July 15, 2004 between NovaStar Financial Inc., and Michael L. Bamburg.
10.3	Amendment dated December 20, 2006 to the Employment Agreement dated September 30, 1996 between NovaStar Financial Inc., and Scott F. Hartman.
10.4	Amendment dated December 20, 2006 to the Employment Agreement dated July 15, 2004 between NovaStar Financial Inc., and Gregory Metz.
10.5	Amendment dated December 20, 2006 to the Employment Agreement dated July 15, 2004 between NovaStar Mortgage Inc., and Dave Pazgan.

EX-10

Exhibit 10.1

AMENDMENT TO W. LANCE ANDERSON

EMPLOYMENT AGREEMENT

This Amendment (the "Amendment") to the Employment Agreement of W. Lance Anderson is entered into as of the 20th day of December, 2006, by and between W. Lance Anderson ("Executive") and NovaStar Financial, Inc., a Maryland corporation (the "Company").

WHEREAS, the Executive and the Company entered into an Employment Agreement dated September 30, 1996 (the “Agreement”); and

WHEREAS, the Executive and the Company desire to amend the Agreement in the manner hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the Executive and the Company agree as follows:

1.The last sentence of subsection (b) under Section 7.A. of the Agreement is amended to read as follows:

“The Severance Amount shall be paid in a single lump sum (i) as soon as possible in event Executive’s employment shall be terminated by the Company other than for Cause or (ii) six months following Executive’s termination of employment due to Good Reason.”

2.Subsection (d) under Section 7.A. of the Agreement is amended by striking the words: “. . . the expiration of three years” under the first sentence of said subsection (d) and by inserting in lieu thereof: “. . . December 31 of the second calendar year following the calendar year in which the termination of employment occurred”.

3.Section 7.A. of the Agreement is hereby amended by adding the following new subsection (e) after the end of subsection (d):

(e) SECTION 280G ADJUSTMENTS.

(i)In the event that the Severance Amount and all other benefits provided for in this Agreement or otherwise payable to the Executive (excluding for this purpose any payments that may be made under this subsection (e)) (the “Company Payments”) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall pay to the Executive, at the time specified in subparagraph (ii) below, an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Company Payments and any payments made pursuant to this subsection (e) and after deduction of any U.S. federal, state and local income or payroll tax on the payments made pursuant to this subsection (e), shall be equal to the Company Payments. For purposes of calculating the Gross-Up Payment, the Executive shall be deemed to pay income taxes at the highest applicable effective federal, state and local income tax marginal rates for the calendar year in which the Gross-Up Payment is to be made.

(ii)Unless the Company and the Executive otherwise agree in writing, the determination of the Executive’s Excise Tax liability and the amount required to be paid under this subsection shall be made promptly in writing by the Company’s independent public accountants or such other tax experts as reasonably agreed to by the Company and the Executive (the “Accountants”) and such amount shall be paid to the Executive promptly, but not before 10 days after such determination. In the event that the Excise Tax incurred by the Executive is determined by the Internal Revenue Service to be greater or lesser than the amount so determined by the Accountants, the Company and the Executive agree to promptly pay such differential as the Accountants reasonably determine is appropriate, including interest and any tax penalties, to the other party. For purposes of making the calculations required by this subsection, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is “substantial authority” tax reporting position. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this subsection. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this subsection. For purposes of the computations herein, the Accountants shall assume that the Executive’s income is subject to income taxes at the highest applicable effective Federal, state and local income tax marginal rates for the calendar year for which a particular computation relates.

(iii)In the event of any proposed adjustment with the Internal Revenue Service (or other applicable taxing authority) with respect to the Excise Tax which would result in an increase in the amount of the Gross-Up Payment, the Executive shall permit the Company to control the issues related to the Excise Tax (at the Company’s expense), provided that such issues do not potentially adversely affect the Executive. In the event issues are interrelated, the Executive and the Company shall in good faith cooperate so as to not jeopardize resolution of either issue. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany the Employee and the Employee and the Employee’s representative shall cooperate with the Company and its representative.

4.The last sentence of subsection (b) under Section 7.B. of the Agreement is amended to read as follows:

“The Severance Amount shall be paid in a single lump sum (i) as soon as possible in event Executive’s employment shall be terminated by the Company other than for Cause or (ii) six months following Executive’s termination of employment due to Good Reason.”

5.A new Section 20 is added to read as follows:

20.CODE SECTION 409A. To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and the applicable U.S. Treasury regulations and other interpretative guidance issued thereunder. Notwithstanding any provision of the Agreement to the contrary, the Company may adopt such amendments to the Agreement or adopt other policies and procedures, or take any other actions, that the Company determines is necessary or appropriate to exempt any benefits under the Agreement from Section 409A of the Code and/or to preserve the intended tax treatment of the benefits provided hereunder, and/or to comply with the requirements of Section 409A and related U.S. Treasury guidance.

6.Except as amended herein, all provisions of the Agreement shall remain and continue in full force and effect.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written. This Amendment may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute an agreement.

	NOVASTAR FINANCIAL, INC.
By		/s/ Scott F. Hartman
		Scott F. Hartman
		EMPLOYEE
		/s/ W. Lance Anderson
		W. Lance Anderson

EX-10

Exhibit 10.2

AMENDMENT TO MICHAEL L. BAMBURG

EMPLOYMENT AGREEMENT

This Amendment (the “Amendment”) to the Employment Agreement of Michael L. Bamburg is entered into as of the 20th day of December, 2006, by and between Michael L. Bamburg (“EMPLOYEE”) and NovaStar Financial, Inc., a Maryland corporation (the “EMPLOYER”).

WHEREAS, the EMPLOYEE and the EMPLOYER entered into an Employment Agreement (the “Agreement”); and

WHEREAS, the EMPLOYEE and the EMPLOYER desire to amend the Agreement in the manner hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the EMPLOYEE and the EMPLOYER agree as follows:

1.The last sentence of the paragraph titled “Severance Payment” under Section 7 of the Agreement is amended to read as follows:

“The severance payment shall be paid in a single lump sum (i) as soon as possible in event EMPLOYEE’S employment shall be terminated by the EMPLOYER other than for Cause or (ii) six months following EMPLOYEE’S termination of employment due to Good Reason.”

2.A new paragraph titled “Section 280G Adjustments” is added to the end of Section 7 as follows:

Section 280G Adjustments. In the event that the severance payment and all other benefits provided for in this Agreement or otherwise payable to the EMPLOYEE (excluding for this purpose any payments that may be made under this paragraph) (the “Company Payments”) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the EMPLOYER shall pay to the EMPLOYEE, at the time specified below, an additional amount (the “Gross-Up Payment”) such that the net amount retained by the EMPLOYEE, after deduction of any Excise Tax on the Company Payments and any payments made pursuant to this paragraph and after deduction of any U.S. federal, state and local income or payroll tax on the payments made pursuant to this paragraph, shall be equal to the Company Payments. For purposes of calculating the Gross-Up Payment, the EMPLOYEE shall be deemed to pay income taxes at the highest applicable effective federal, state and local income tax marginal rates for the calendar year in which the Gross-Up Payment is to be made.

Unless the EMPLOYER and the EMPLOYEE otherwise agree in writing, the determination of the EMPLOYEE’s Excise Tax liability and the amount required to be paid pursuant to the foregoing shall be made promptly in writing by the EMPLOYER’s independent public accountants or such other tax experts as reasonably agreed to by the EMPLOYER and the EMPLOYEE (the “Accountants”) and such amount shall be paid to the EMPLOYEE promptly, but not before 10 days after such determination. In the event that the Excise Tax incurred by the EMPLOYEE is determined by the Internal Revenue Service to be greater or lesser than the amount so determined by the Accountants, the EMPLOYER and the EMPLOYEE agree to promptly pay such differential as the Accountants reasonably determine is appropriate, including interest and any tax penalties, to the other party. For purposes of making the foregoing calculations, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is “substantial authority” tax reporting position. The EMPLOYER and the EMPLOYEE shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make such determination. The EMPLOYER shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this paragraph. For purposes of the computations herein, the Accountants shall assume that the EMPLOYEE’s income is subject to income taxes at the highest applicable effective Federal, state and local income tax marginal rates for the calendar year for which a particular computation relates.

In the event of any proposed adjustment with the Internal Revenue Service (or other applicable taxing authority) with respect to the Excise Tax which would result in an increase in the amount of the Gross-Up Payment, the EMPLOYEE shall permit the EMPLOYER to control the issues related to the Excise Tax (at the EMPLOYER’s expense), provided that such issues do not potentially adversely affect the EMPLOYEE. In the event issues are interrelated, the EMPLOYEE and the EMPLOYER shall in good faith cooperate so as to not jeopardize resolution of either issue. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the EMPLOYEE shall permit the representative of the EMPLOYER to accompany the EMPLOYEE and the EMPLOYEE and the EMPLOYEE’s representative shall cooperate with the EMPLOYER and its representative.

3. A new Section 22 is added to read as follows:

22. CODE SECTION 409A

To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and the applicable U.S. Treasury regulations and other interpretative guidance issued thereunder. Notwithstanding any provision of the Agreement to the contrary, the EMPLOYER may adopt such amendments to the Agreement or adopt other policies and procedures, or take any other actions, that the EMPLOYER determines is necessary or appropriate to exempt any benefits under the Agreement from Section 409A of the Code and/or to preserve the intended tax treatment of the benefits provided hereunder, and/or to comply with the requirements of Section 409A and related U.S. Treasury guidance.

4.Except as amended herein, all provisions of the Agreement shall remain and continue in full force and effect.

[The remainder of this page is intentionally left blank]

IN WITNESS WHEREOF, the EMPLOYER has caused this Agreement to be executed by its duly authorized officer, and the EMPLOYEE has hereunto signed this Agreement, as of the date first above written. This Amendment may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute an agreement.

	NOVASTAR FINANCIAL, INC.
By		/s/ Scott F. Hartman
		Scott F. Hartman
		EMPLOYEE
		/s/ Michael L. Bamburg
		Michael L. Bamburg

EX-10

Exhibit 10.3

AMENDMENT TO SCOTT F. HARTMAN

EMPLOYMENT AGREEMENT

This Amendment (the “Amendment”) to the Employment Agreement of Scott F. Hartman is entered into as of the 20th day of December, 2006, by and between Scott F. Hartman (“Executive”) and NovaStar Financial, Inc., a Maryland corporation (the “Company”).

WHEREAS, the Executive and the Company entered into an Employment Agreement dated September 30, 1996 (the “Agreement”); and

WHEREAS, the Executive and the Company desire to amend the Agreement in the manner hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the Executive and the Company agree as follows:

1.The last sentence of subsection (b) under Section 7.A. of the Agreement is amended to read as follows:

“The Severance Amount shall be paid in a single lump sum (i) as soon as possible in event Executive’s employment shall be terminated by the Company other than for Cause or (ii) six months following Executive’s termination of employment due to Good Reason.”

2.Subsection (d) under Section 7.A. of the Agreement is amended by striking the words: “. . . the expiration of three years” under the first sentence of said subsection (d) and by inserting in lieu thereof: “. . . December 31 of the second calendar year following the calendar year in which the termination of employment occurred”.

3.Section 7.A. of the Agreement is hereby amended by adding the following new subsection (e) after the end of subsection (d):

(e) SECTION 280G ADJUSTMENTS.

(i)In the event that the Severance Amount and all other benefits provided for in this Agreement or otherwise payable to the Executive (excluding for this purpose any payments that may be made under this subsection (e)) (the “Company Payments”) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall pay to the Executive, at the time specified in subparagraph (ii) below, an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Company Payments and any payments made pursuant to this subsection (e) and after deduction of any U.S. federal, state and local income or payroll tax on the payments made pursuant to this subsection (e), shall be equal to the Company Payments. For purposes of calculating the Gross-Up Payment, the Executive shall be deemed to pay income taxes at the highest applicable effective federal, state and local income tax marginal rates for the calendar year in which the Gross-Up Payment is to be made.

(ii)Unless the Company and the Executive otherwise agree in writing, the determination of the Executive’s Excise Tax liability and the amount required to be paid under this subsection shall be made promptly in writing by the Company’s independent public accountants or such other tax experts as reasonably agreed to by the Company and the Executive (the “Accountants”) and such amount shall be paid to the Executive promptly, but not before 10 days after such determination. In the event that the Excise Tax incurred by the Executive is determined by the Internal Revenue Service to be greater or lesser than the amount so determined by the Accountants, the Company and the Executive agree to promptly pay such differential as the Accountants reasonably determine is appropriate, including interest and any tax penalties, to the other party. For purposes of making the calculations required by this subsection, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is “substantial authority” tax reporting position. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this subsection. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this subsection. For purposes of the computations herein, the Accountants shall assume that the Executive’s income is subject to income taxes at the highest applicable effective Federal, state and local income tax marginal rates for the calendar year for which a particular computation relates.

(iii)In the event of any proposed adjustment with the Internal Revenue Service (or other applicable taxing authority) with respect to the Excise Tax which would result in an increase in the amount of the Gross-Up Payment, the Executive shall permit the Company to control the issues related to the Excise Tax (at the Company’s expense), provided that such issues do not potentially adversely affect the Executive. In the event issues are interrelated, the Executive and the Company shall in good faith cooperate so as to not jeopardize resolution of either issue. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany the Employee and the Employee and the Employee’s representative shall cooperate with the Company and its representative.

4.The last sentence of subsection (b) under Section 7.B. of the Agreement is amended to read as follows:

“The Severance Amount shall be paid in a single lump sum (i) as soon as possible in event Executive’s employment shall be terminated by the Company other than for Cause or (ii) six months following Executive’s termination of employment due to Good Reason.”

5.A new Section 20 is added to read as follows:

20.CODE SECTION 409A. To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and the applicable U.S. Treasury regulations and other interpretative guidance issued thereunder. Notwithstanding any provision of the Agreement to the contrary, the Company may adopt such amendments to the Agreement or adopt other policies and procedures, or take any other actions, that the Company determines is necessary or appropriate to exempt any benefits under the Agreement from Section 409A of the Code and/or to preserve the intended tax treatment of the benefits provided hereunder, and/or to comply with the requirements of Section 409A and related U.S. Treasury guidance.

6.Except as amended herein, all provisions of the Agreement shall remain and continue in full force and effect.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written. This Amendment may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute an agreement.

	NOVASTAR FINANCIAL, INC.
By		/s/ W. Lance Anderson
		W. Lance Anderson
		EMPLOYEE
		/s/Scott F. Hartman
		Scott F. Hartman

EX-10

Exhibit 10.4

AMENDMENT TO GREGORY METZ

EMPLOYMENT AGREEMENT

This Amendment (the “Amendment”) to the Employment Agreement of Gregory Metz is entered into as of the 20th day of December, 2006, by and between Gregory Metz (“EMPLOYEE”) and NovaStar Financial, Inc., a Maryland corporation (the “EMPLOYER”).

WHEREAS, the EMPLOYEE and the EMPLOYER entered into an Employment Agreement (the “Agreement”); and

WHEREAS, the EMPLOYEE and the EMPLOYER desire to amend the Agreement in the manner hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the EMPLOYEE and the EMPLOYER agree as follows:

1.The last sentence of the paragraph titled “Severance Payment” under Section 7 of the Agreement is amended to read as follows:

“The severance payment shall be paid in a single lump sum (i) as soon as possible in event EMPLOYEE’S employment shall be terminated by the EMPLOYER other than for Cause or (ii) six months following EMPLOYEE’S termination of employment due to Good Reason.”

2.A new paragraph titled “Section 280G Adjustments” is added to the end of Section 7 as follows:

Section 280G Adjustments. In the event that the severance payment and all other benefits provided for in this Agreement or otherwise payable to the EMPLOYEE (excluding for this purpose any payments that may be made under this paragraph) (the “Company Payments”) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the EMPLOYER shall pay to the EMPLOYEE, at the time specified below, an additional amount (the “Gross-Up Payment”) such that the net amount retained by the EMPLOYEE, after deduction of any Excise Tax on the Company Payments and any payments made pursuant to this paragraph and after deduction of any U.S. federal, state and local income or payroll tax on the payments made pursuant to this paragraph, shall be equal to the Company Payments. For purposes of calculating the Gross-Up Payment, the EMPLOYEE shall be deemed to pay income taxes at the highest applicable effective federal, state and local income tax marginal rates for the calendar year in which the Gross-Up Payment is to be made.

Unless the EMPLOYER and the EMPLOYEE otherwise agree in writing, the determination of the EMPLOYEE’s Excise Tax liability and the amount required to be paid pursuant to the foregoing shall be made promptly in writing by the EMPLOYER’s independent public accountants or such other tax experts as reasonably agreed to by the EMPLOYER and the EMPLOYEE (the “Accountants”) and such amount shall be paid to the EMPLOYEE promptly, but not before 10 days after such determination. In the event that the Excise Tax incurred by the EMPLOYEE is determined by the Internal Revenue Service to be greater or lesser than the amount so determined by the Accountants, the EMPLOYER and the EMPLOYEE agree to promptly pay such differential as the Accountants reasonably determine is appropriate, including interest and any tax penalties, to the other party. For purposes of making the foregoing calculations, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is “substantial authority” tax reporting position. The EMPLOYER and the EMPLOYEE shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make such determination. The EMPLOYER shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this paragraph. For purposes of the computations herein, the Accountants shall assume that the EMPLOYEE’s income is subject to income taxes at the highest applicable effective Federal, state and local income tax marginal rates for the calendar year for which a particular computation relates.

In the event of any proposed adjustment with the Internal Revenue Service (or other applicable taxing authority) with respect to the Excise Tax which would result in an increase in the amount of the Gross-Up Payment, the EMPLOYEE shall permit the EMPLOYER to control the issues related to the Excise Tax (at the EMPLOYER’s expense), provided that such issues do not potentially adversely affect the EMPLOYEE. In the event issues are interrelated, the EMPLOYEE and the EMPLOYER shall in good faith cooperate so as to not jeopardize resolution of either issue. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the EMPLOYEE shall permit the representative of the EMPLOYER to accompany the EMPLOYEE and the EMPLOYEE and the EMPLOYEE’s representative shall cooperate with the EMPLOYER and its representative.

3. A new Section 22 is added to read as follows:

22. CODE SECTION 409A

To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and the applicable U.S. Treasury regulations and other interpretative guidance issued thereunder. Notwithstanding any provision of the Agreement to the contrary, the EMPLOYER may adopt such amendments to the Agreement or adopt other policies and procedures, or take any other actions, that the EMPLOYER determines is necessary or appropriate to exempt any benefits under the Agreement from Section 409A of the Code and/or to preserve the intended tax treatment of the benefits provided hereunder, and/or to comply with the requirements of Section 409A and related U.S. Treasury guidance.

4.Except as amended herein, all provisions of the Agreement shall remain and continue in full force and effect.

[The remainder of this page is intentionally left blank]

IN WITNESS WHEREOF, the EMPLOYER has caused this Agreement to be executed by its duly authorized officer, and the EMPLOYEE has hereunto signed this Agreement, as of the date first above written. This Amendment may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute an agreement.

	NOVASTAR FINANCIAL, INC.
By		/s/ Scott F. Hartman
		Scott F. Hartman
		EMPLOYEE
		/s/ Gregory Metz
		Gregory Metz

EX-10

Exhibit 10.5

AMENDMENT TO DAVE PAZGAN

EMPLOYMENT AGREEMENT

This Amendment (the “Amendment”) to the Employment Agreement of Dave Pazgan is entered into as of the 20^th day of December, 2006, by and between Dave Pazgan (“EMPLOYEE”) and NovaStar Mortgage, Inc., a Virginia corporation (the “EMPLOYER”).

WHEREAS, the EMPLOYEE and the EMPLOYER entered into an Employment Agreement dated November 10, 2004 (the “Agreement”); and

WHEREAS, the EMPLOYEE and the EMPLOYER desire to amend the Agreement in the manner hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the EMPLOYEE and the EMPLOYER agree as follows:

1.The last sentence of the paragraph titled “Severance Payment” under Section 7 of the Agreement is amended to read as follows:

“The severance payment shall be paid in a single lump sum (i) as soon as possible in event EMPLOYEE’S employment shall be terminated by the EMPLOYER other than for Cause or (ii) six months following EMPLOYEE’S termination of employment due to Good Reason.”

2.A new paragraph titled “Section 280G Adjustments” is added to the end of Section 7 as follows:

Section 280G Adjustments. In the event that the severance payment and all other benefits provided for in this Agreement or otherwise payable to the EMPLOYEE (excluding for this purpose any payments that may be made under this paragraph) (the “Company Payments”) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the EMPLOYER shall pay to the EMPLOYEE, at the time specified below, an additional amount (the “Gross-Up Payment”) such that the net amount retained by the EMPLOYEE, after deduction of any Excise Tax on the Company Payments and any payments made pursuant to this paragraph and after deduction of any U.S. federal, state and local income or payroll tax on the payments made pursuant to this paragraph, shall be equal to the Company Payments. For purposes of calculating the Gross-Up Payment, the EMPLOYEE shall be deemed to pay income taxes at the highest applicable effective federal, state and local income tax marginal rates for the calendar year in which the Gross-Up Payment is to be made.

Unless the EMPLOYER and the EMPLOYEE otherwise agree in writing, the determination of the EMPLOYEE’s Excise Tax liability and the amount required to be paid pursuant to the foregoing shall be made promptly in writing by the EMPLOYER’s independent public accountants or such other tax experts as reasonably agreed to by the EMPLOYER and the EMPLOYEE (the “Accountants”) and such amount shall be paid to the EMPLOYEE promptly, but not before 10 days after such determination. In the event that the Excise Tax incurred by the EMPLOYEE is determined by the Internal Revenue Service to be greater or lesser than the amount so determined by the Accountants, the EMPLOYER and the EMPLOYEE agree to promptly pay such differential as the Accountants reasonably determine is appropriate, including interest and any tax penalties, to the other party. For purposes of making the foregoing calculations, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is “substantial authority” tax reporting position. The EMPLOYER and the EMPLOYEE shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make such determination. The EMPLOYER shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this paragraph. For purposes of the computations herein, the Accountants shall assume that the EMPLOYEE’s income is subject to income taxes at the highest applicable effective Federal, state and local income tax marginal rates for the calendar year for which a particular computation relates.

In the event of any proposed adjustment with the Internal Revenue Service (or other applicable taxing authority) with respect to the Excise Tax which would result in an increase in the amount of the Gross-Up Payment, the EMPLOYEE shall permit the EMPLOYER to control the issues related to the Excise Tax (at the EMPLOYER’s expense), provided that such issues do not potentially adversely affect the EMPLOYEE. In the event issues are interrelated, the EMPLOYEE and the EMPLOYER shall in good faith cooperate so as to not jeopardize resolution of either issue. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the EMPLOYEE shall permit the representative of the EMPLOYER to accompany the EMPLOYEE and the EMPLOYEE and the EMPLOYEE’s representative shall cooperate with the EMPLOYER and its representative.

3. A new Section 22 is added to read as follows:

22. CODE SECTION 409A

To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and the applicable U.S. Treasury regulations and other interpretative guidance issued thereunder. Notwithstanding any provision of the Agreement to the contrary, the EMPLOYER may adopt such amendments to the Agreement or adopt other policies and procedures, or take any other actions, that the EMPLOYER determines is necessary or appropriate to exempt any benefits under the Agreement from Section 409A of the Code and/or to preserve the intended tax treatment of the benefits provided hereunder, and/or to comply with the requirements of Section 409A and related U.S. Treasury guidance.

4.Except as amended herein, all provisions of the Agreement shall remain and continue in full force and effect.

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IN WITNESS WHEREOF, the EMPLOYER has caused this Agreement to be executed by its duly authorized officer, and the EMPLOYEE has hereunto signed this Agreement, as of the date first above written. This Amendment may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute an agreement.

	NOVASTAR MORTGAGE, INC.
By	/s/ Scott F. Hartman
	Scott F. Hartman
	EMPLOYEE
	/s/ Dave Pazgan
	Dave Pazgan