NFI Novastar Finl

⁽¹⁾            On July 16, 2007, Jefferies Capital Partners IV LP, a Delaware limited partnership ("Jefferies Capital Partners IV"), Jefferies Employee Partners IV LLC, a Delaware limited liability company ("Jefferies Employee Partners"), and JCP Partners IV LLC, a Delaware limited liability company ("JCP Partners" and together with Jefferies Capital Partners IV and Jefferies Employee Partners, "Jefferies Capital Partners"), entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with Massachusetts Mutual Life Insurance Company, a Massachusetts corporation ("MassMutual" together with Jefferies Capital Partners, the "Investors") and NovaStar Financial, Inc., a Maryland corporation (the "Company"), pursuant to which Jefferies Capital Partners IV purchased 911,659 shares of the Company's 9.00% Series D 1 Mandatory Convertible Preferred Stock, par value $0.01 per share ("Series D 1 Preferred Stock"). The shares of Series D 1 Preferred Stock purchased by Jefferies Capital Partners IV under the Securities Purchase Agreement are initially convertible into 813,981 shares of the Company's common stock, par value $0.01 per share ("Common Stock").

⁽²⁾            Based on 9,469,031 shares of Common Stock outstanding as of July 31, 2007, as reported in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007, plus 1,875,000 shares of Common Stock on an as-converted basis based on the 2,100,000 shares of Series D 1 Preferred Stock issued by the Company pursuant to the Securities Purchase Agreement.

⁽³⁾            Common Stock share amounts have been adjusted to reflect the one-for-four reverse stock split effected by the Company on July 30, 2007.

⁽¹⁾            Pursuant to the Securities Purchase Agreement, Jefferies Employee Partners purchased 105,002 shares of Series D 1 Preferred Stock, which are initially convertible into 93,752 shares of the Common Stock.

⁽²⁾            Based on 9,469,031 shares of Common Stock outstanding as of July 31, 2007, as reported in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007, plus 1,875,000 shares of Common Stock on an as-converted basis based on the 2,100,000 shares of Series D 1 Preferred Stock issued by the Company pursuant to the Securities Purchase Agreement.

⁽³⁾            Common Stock share amounts have been adjusted to reflect the one-for-four reverse stock split effected by the Company on July 30, 2007.

⁽¹⁾            Pursuant to the Securities Purchase Agreement, JCP Partners purchased 33,339 shares of Series D 1 Preferred Stock, which are initially convertible into 29,767 shares of the Common Stock.

⁽²⁾            Based on 9,469,031 shares of Common Stock outstanding as of July 31, 2007, as reported in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007, plus 1,875,000 shares of Common Stock on an as-converted basis based on the 2,100,000 shares of Series D 1 Preferred Stock issued by the Company pursuant to the Securities Purchase Agreement.

⁽³⁾            Common Stock share amounts have been adjusted to reflect the one-for-four reverse stock split effected by the Company on July 30, 2007.

⁽¹⁾            JCP IV LLC, a Delaware limited liability company (the "General Partner"), is the general partner of Jefferies Capital Partners IV and is the managing member of each of Jefferies Employee Partners and JCP Partners. Pursuant to the Securities Purchase Agreement, Jefferies Capital Partners purchased 1,050,000 shares of Series D 1 Preferred Stock, which are initially convertible into 937,500 shares of the Common Stock.

⁽²⁾            Based on 9,469,031 shares of Common Stock outstanding as of July 31, 2007, as reported in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007, plus 1,875,000 shares of Common Stock on an as-converted basis based on the 2,100,000 shares of Series D 1 Preferred Stock issued by the Company pursuant to the Securities Purchase Agreement.

⁽³⁾            Common Stock share amounts have been adjusted to reflect the one-for-four reverse stock split effected by the Company on July 30, 2007.

⁽¹⁾            Jefferies Capital Partners IV LLC, a Delaware limited liability company (the "Manager"), is the manager of Jefferies Capital Partners and the managing member of the General Partner. Pursuant to the Securities Purchase Agreement, Jefferies Capital Partners purchased 1,050,000 shares of Series D 1 Preferred Stock, which are initially convertible into 937,500 shares of the Common Stock.

⁽²⁾            Based on 9,469,031 shares of Common Stock outstanding as of July 31, 2007, as reported in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007, plus 1,875,000 shares of Common Stock on an as-converted basis based on the 2,100,000 shares of Series D 1 Preferred Stock issued by the Company pursuant to the Securities Purchase Agreement.

⁽³⁾            Common Stock share amounts have been adjusted to reflect the one-for-four reverse stock split effected by the Company on July 30, 2007.

⁽¹⁾            Brian P. Friedman ("Mr. Friedman") is a managing member of the Manager. Pursuant to the Securities Purchase Agreement, Jefferies Capital Partners purchased 1,050,000 shares of Series D 1 Preferred Stock, which are initially convertible into 937,500 shares of the Common Stock.

⁽²⁾            Based on 9,469,031 shares of Common Stock outstanding as of July 31, 2007, as reported in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007, plus 1,875,000 shares of Common Stock on an as-converted basis based on the 2,100,000 shares of Series D 1 Preferred Stock issued by the Company pursuant to the Securities Purchase Agreement.

⁽³⁾            Common Stock share amounts have been adjusted to reflect the one-for-four reverse stock split effected by the Company on July 30, 2007.

⁽¹⁾            James L. Luikart ("Mr. Luikart") is a managing member of the Manager. Pursuant to the Securities Purchase Agreement, Jefferies Capital Partners purchased 1,050,000 shares of Series D 1 Preferred Stock, which are initially convertible into 937,500 shares of the Common Stock.

⁽²⁾            Based on 9,469,031 shares of Common Stock outstanding as of July 31, 2007, as reported in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007, plus 1,875,000 shares of Common Stock on an as-converted basis based on the 2,100,000 shares of Series D 1 Preferred Stock issued by the Company pursuant to the Securities Purchase Agreement.

⁽³⁾            Common Stock share amounts have been adjusted to reflect the one-for-four reverse stock split effected by the Company on July 30, 2007.

          This Amendment No. 1 to Schedule 13D relating to the Company is being filed on behalf of the undersigned to amend the Schedule 13D filed with the Securities and Exchange Commission on July 26, 2007 (the "Schedule 13D"). Capitalized terms not otherwise defined herein have the meanings given them in the Schedule 13D.

Item 4. Purpose of the Transaction.

          The information in Item 4 is hereby amended and supplemented as follows:

          On September 4, 2007, the Company announced the cancellation of the Rights Offering. On September 17, 2007, the Company announced that it will not declare and pay the REIT Dividend. As a result of the cancellation of the Rights Offering and/or the failure by the Company to declare the REIT Dividend, Jefferies Capital Partners will not be required to purchase any shares of Series D 2 Preferred Stock as previously contemplated by the Standby Purchase Agreement. In addition, as a result of the Company's failure to declare and pay the REIT Dividend, Jefferies Capital Partners will not receive any shares of Series E Preferred Stock that were previously contemplated to be distributed by the Company in connection with the REIT Dividend.

Item 5. Interest in Securities of the Issuer .

          The information in Item 5 is hereby amended and supplemented as follows:

          (a) As of October 5, 2007, (i) Jefferies Capital Partners IV was the holder of 911,659 shares of Series D 1 Preferred Stock, (ii) Jefferies Employee Partners was the holder of 105,002 shares of Series D 1 Preferred Stock and (iii) JCP Partners was the holder of 33,339 shares of Series D 1 Preferred Stock. The shares of Series D 1 Preferred Stock purchased by Jefferies Capital Partners IV, Jefferies Employee Partners and JCP Partners under the Securities Purchase Agreement are initially convertible into 813,981, 93,752 and 29,767 shares of Common Stock, respectively, or approximately 7.2%, 0.8% and 0.3% of the Common Stock deemed issued and outstanding as of that date, respectively. As of October 5, 2007, (A) Jefferies Capital Partners IV beneficially owned 813,981 shares of Common Stock, or approximately 7.2% of the Common Stock deemed issued and outstanding as of that date, (B) Jefferies Employee Partners beneficially owned 93,752 shares of Common Stock, or approximately 0.8% of the Common Stock deemed issued and outstanding as of that date, (C) JCP Partners beneficially owned 29,767 shares of Common Stock, or approximately 0.3% of the Common Stock deemed issued and outstanding as of that date, (D) General Partner, as a result of its roles as general partner of Jefferies Capital Partners IV and managing member of each of Jefferies Employee Partners and JCP Partners may be deemed to be the beneficial owner, in the aggregate, of 937,500 shares of Common Stock, or approximately 8.3% of the Common Stock deemed issued and outstanding as of that date, which number consists of (I) 813,981 shares of Common Stock, or approximately 7.2% of the Common Stock deemed beneficially owned by Jefferies Capital Partners IV, (II) 93,752 shares of Common Stock, or approximately 0.8% of the Common Stock deemed beneficially owned by Jefferies Employee Partners, and (III) 29,767 shares of Common Stock, or approximately 0.3% of the Common Stock deemed beneficially owned by JCP Partners, (E) Manager, as a result of its roles as manager of Jefferies Capital Partners and managing member of the General Partner, may be deemed to be the beneficial owner, in the aggregate, of 937,500 shares of Common Stock, or approximately 8.3% of the Common Stock deemed issued and outstanding as of that date, which number consists of (I) 813,981 shares of Common Stock, or approximately 7.2% of the Common Stock deemed beneficially owned by Jefferies Capital Partners IV, (II) 93,752 shares of Common Stock, or approximately 0.8% of the Common Stock deemed beneficially owned by Jefferies Employee Partners, and (III) 29,767 shares of Common Stock, or approximately 0.3% of the Common Stock deemed beneficially owned by JCP Partners, (F) Mr. Friedman, as a result of his position as a managing member of Manager, may be deemed to be the beneficial owner, in the aggregate, of 937,500 shares of Common Stock, or approximately 8.3% of the Common Stock deemed issued and outstanding as of that date, and (G) Mr. Luikart, as a result of his position as a managing member of Manager, may be deemed to be the beneficial owner, in the aggregate, of 937,500 shares of Common Stock, or approximately 8.3% of the Common Stock deemed issued and outstanding as of that date. The percentages set forth above are based on the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007 (which disclosed 9,469,031 shares of Common Stock outstanding as of July 31, 2007), plus 1,875,000 shares of Common Stock on an as-converted basis based on the 2,100,000 shares of Series D 1 Preferred Stock issued by the Company pursuant to the Securities Purchase Agreement.

          (b) Jefferies Capital Partners IV shares with Manager, General Partner, Mr. Friedman and Mr. Luikart the power to vote and dispose of 813,981 shares of Common Stock for which it is deemed the beneficial owner. Jefferies Employee Partners shares with Manager, the General Partner, Mr. Friedman and Mr. Luikart the power to vote and dispose of 93,752 shares of Common Stock for which it is deemed the beneficial owner. JCP Partners shares with Manager, the General Partner, Mr. Friedman and Mr. Luikart the power to vote and dispose of 29,767 shares of Common Stock for which it is deemed the beneficial owner. Each of Manager, the General Partner, Mr. Friedman and Mr. Luikart shares the power to vote 937,500 shares of Common Stock for which it may be deemed the beneficial owner. Neither Jefferies Capital Partners IV, Jefferies Employee Partners, JCP Partners, General Partner, Manager, Mr. Friedman nor Mr. Luikart has the sole power to vote or dispose of any shares of Common Stock for which it is or may be deemed the beneficial owner.

Item 6. Contracts, Arrangements, Understandings or Relationships with respect to Securities of the Issuer .

          The information in Item 6 is hereby amended and supplemented as follows:

          On September 4, 2007, the Company announced the cancellation of the Rights Offering. On September 17, 2007, the Company announced that it will not declare and pay the REIT Dividend. As a result of the cancellation of the Rights Offering and/or the failure by the Company to declare the REIT Dividend, Jefferies Capital Partners will not be required to purchase any shares of Series D 2 Preferred Stock as previously contemplated by the Standby Purchase Agreement. In addition, as a result of the Company's failure to declare and pay the REIT Dividend, Jefferies Capital Partners will not receive any shares of Series E Preferred Stock that were previously contemplated to be distributed by the Company in connection with the REIT Dividend.

Item 7. Material to be Filed as Exhibits.

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.