Novastar Financial, Inc. Articles Supplementary for 9.00% Series D1 Mandatory Convertible Preferred Stock

 EXHIBIT 4.1 NOVASTAR FINANCIAL, INC. ARTICLES SUPPLEMENTARY 9.00% SERIES D1 MANDATORY CONVERTIBLE PREFERRED STOCK (Par Value $0.01 Per Share) Novastar Financial, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Under a power set forth in Article VI of the Charter of the Corporation, as amended, the Board of Directors of the Corporation, by resolution duly adopted classified and designated 2,100,000 shares of the authorized but unissued shares of common stock, par value $0.01 per share, of the Corporation as the "9.00% Series D1 Mandatory Convertible Preferred Stock"; and SECOND: The preferences, conversion, and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of shares of the 9.00% Series D1 Mandatory Convertible Preferred Stock are as follows: Section 1. Designation and Number. A series of Preferred Stock, designated as the "9.00% Series D1 Mandatory Convertible Preferred Stock" (the "Series D1 Preferred Stock") is hereby established. The number of shares of Series D1 Preferred Stock shall be 2,100,000 shares. The par value of the Series D1 Preferred Stock shall be $0.01 per share. Certain defined terms used in these Articles Supplementary have the meaning assigned thereto in Section 10. Section 2. Ranking. The Series D1 Preferred Stock shall rank, with respect to payment of dividends and distribution of assets upon a Liquidation Event: (i) senior to the common stock, par value $0.01 per share, of the Corporation (the "Common Stock"), whether now outstanding or hereafter issued, and to each other class or series of shares of the Capital Stock of the Corporation established by the Board of Directors of the Corporation (the "Board of Directors") after the date hereof, the terms of which do not expressly provide that such class or series of Capital Stock ranks senior to or pari passu with the Series D1 Preferred Stock as to payment of dividends and distribution of assets upon a Liquidation Event (collectively referred to as "Junior Shares"); (ii) pari passu with the 8.90% Series C Cumulative Redeemable Preferred Stock of the Corporation (the "Series C Preferred Stock"), the 9.00% Series D2 Convertible Preferred Stock of the Corporation (the "Series D2 Preferred Stock"), the 9.00% Series E Mandatory Convertible Preferred Stock of the Corporation (the "Series E Preferred Stock") and each class or series of shares of the Corporation, the terms of which expressly provide that such class or series ranks pari passu with the Series D1 Preferred Stock as to payment of dividends and distribution of assets upon a Liquidation Event (collectively referred to as "Parity Shares"); and (iii) junior to each other class or series of shares of the Corporation, the terms of which expressly provide that such class or series ranks senior to the Series D1 Preferred Stock as to payment of dividends and distribution of assets upon a Liquidation Event (collectively referred to as "Senior Shares"). The Corporation's ability to issue, authorize or 

 increase the authorized amount of Parity Shares or Senior Shares shall be subject to the provisions of Section 5. Section 3. Dividends. Payment of Dividends. Dividends on the Series D1 Preferred Stock shall be cumulative and shall accumulate daily, whether or not such dividends have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of cash dividends, at the rate per annum of 9.00% on the Adjusted Stated Value of each share of Series D1 Preferred Stock (the "Dividend Rate"). Except as provided in Section 3(d), dividends on the Series D1 Preferred Stock shall accumulate on a non-compounding basis. The Corporation shall pay accumulated dividends on each share of Series D1 Preferred Stock when, as and if authorized by the Board of Directors and declared by the Corporation, out of funds legally available for the payment of dividends, semi-annually on (i) January 16 and July 16 (each, a "Dividend Payment Date") of each year to the Holders of record at the close of business on the preceding December 16 and June 16, respectively (each a "Dividend Record Date"), and (ii) upon a conversion of the Series D1 Preferred Stock into Common Stock or Series D2 Preferred Stock; provided that, if any Dividend Payment Date falls on a day that is not a Business Day, the related dividend will be paid on the next day that is a Business Day, with the same force and effect as if the dividend payment had been made on such Dividend Payment Date with interest at the Dividend Rate with respect to the delayed payment. The amount of dividends accumulating on the Series D1 Preferred Stock and on any delayed payment of dividends due to a Dividend Payment Date falling on a date that is not a Business Day will be computed on the basis of a 360-day year consisting of twelve 30-day months. (b) Payment of Cash Dividends on Parity Stock. No dividends or other distributions (other than a dividend or distribution payable solely in shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock) and cash in lieu of fractional shares) may be declared, made or paid, or set apart for payment upon, any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock be redeemed, purchased or otherwise acquired for any consideration (or any money paid to or made available for a sinking fund for the redemption of any Parity Stock or Junior Stock) by or on behalf of the Corporation (including by any Subsidiary of the Corporation), directly or indirectly, including without limitation, any such dividend, distribution, redemption, purchase or acquisition of Capital Stock of any Subsidiary of the Corporation (except by conversion into or exchange for shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock)) unless all dividends on the Series D1 Preferred Stock that have accumulated through the Dividend Payment Date preceding the date of such declaration, payment, distribution, redemption, purchase or acquisition and all dividends on any Parity Stock that have accumulated through the applicable dividend payment date of such Parity Stock preceding the date of such declaration, payment, distribution, redemption, purchase or acquisition are declared and paid in full, or are declared and a sum sufficient for the payment thereof in full is set apart for such payment. (c) Participation Rights in Common Stock Dividends. In the event the Corporation should at any time or from time to time after the date Articles Supplementary containing the terms of the Series D1 Preferred Stock are first filed with the State Department of Assessments and Taxation of Maryland, fix a record date for the making of any dividend, 2 

 distribution or payment of any sort or kind to holders of shares of Common Stock, including, without limitation, distributions of evidences of indebtedness, assets (including cash), other property or shares of Common Stock or other securities in the Corporation or rights, options or warrants with respect thereto, the Corporation may not pay any such dividend, distribution or payment unless the Corporation also pays to each Holder of Series D1 Preferred Stock a distribution equal to the distribution such Holder would have been entitled to receive if such Holder had exercised its right to convert all of its Series D1 Preferred Stock for shares of Common Stock pursuant to Section 6 immediately prior to the record date with respect to such dividend or distribution. The payment made to Holders of Series D1 Preferred Stock under the preceding sentence shall be made concurrently with the payment of the dividend or distribution to the holders of shares of Common Stock. Any dividend or distribution that is paid with respect to the shares of Series D1 Preferred Stock pursuant to this Section 3(b) shall be in addition to, separate from, and shall not reduce or otherwise affect, the dividends accruing on each share of Series D1 Preferred Stock pursuant to Section 3(a). (d) Dividend Default Rate. If the Corporation fails to pay a dividend on the Series D1 Preferred Stock on any Dividend Payment Date, whether or not such dividends have been authorized by the Board of Directors and declared by the Corporation or whether or not there are funds legally available for such dividends, then the Dividend Rate shall be automatically increased (without a need for any notice given or other action taken on the part of any person) to 13% per annum, compounded quarterly, both with respect to the unpaid dividend and all subsequently accumulating dividends until the Board of Directors authorizes and the Corporation pays to the Holders of the Series D1 Preferred Stock all accumulated and unpaid dividends on the Series D1 Preferred Stock. (e) Certain Determinations for Preferential Rights Upon Dissolution. Solely for purposes of determining whether a distribution (other than upon voluntary or involuntary dissolution) by dividend, redemption or other acquisition of shares of the Corporation or otherwise is permitted under Maryland law, amounts that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the holders of the Series D1 Preferred Stock will not be added to the Corporation's total liabilities. Section 4. Liquidation Preference. (a) Liquidation Event. In the event of any voluntary or involuntary liquidation (in bankruptcy or otherwise), dissolution or winding-up of the Corporation (each, a "Liquidation Event"), each Holder of Series D1 Preferred Stock, by reason of its ownership thereof, shall be entitled to receive out of the assets of the Corporation available for distribution to shareholders of the Corporation, prior and in preference to any payment or distribution of assets of the Corporation to the holders of its shares of Common Stock or any other Junior Shares, but after any distribution on any Senior Shares, an amount equal to the greater of (i) the aggregate Liquidation Preference attributable to the Series D1 Preferred Stock held by such Holder, or (ii) the amount that such Holder would have been entitled to receive with respect to such Liquidation Event if it had exercised its right to convert all of its Series D1 Preferred Stock into shares of Common Stock pursuant to Section 6 immediately prior to such Liquidation Event. The "Liquidation Preference" of each share of Series D1 Preferred Stock shall be the Adjusted Stated 3 

 Value per share of Series D1 Preferred Stock plus all accumulated but unpaid dividends on the Series D1 Preferred Stock. (b) Manner of Distribution. In the event the assets of the Corporation available for distribution or payment to Holders upon any Liquidation Event shall be insufficient to pay in full all amounts to which such Holders are entitled pursuant to Section 4(a), (i) no such distribution or payment shall be made on account of any Junior Shares upon such Liquidation Event; and (ii) no such distribution or payment shall be made on account of any Parity Shares upon such Liquidation Event unless proportionate amounts are paid on account of the Series D1 Preferred Stock, with all such distributions or payments on account of the Series D1 Preferred Stock and any Parity Shares made pro rata on the basis of the aggregate liquidation preference of the outstanding shares of each such class or series of Capital Stock and (without double-counting) accumulated dividends to which the holder of each such class or series is entitled to receive upon such Liquidation Event. After the payment to the Holders of the full preferential amounts provided for above, the Holders, in their capacities as holders of Series D1 Preferred Stock (and no other capacity), shall have no right or claim to any of the remaining assets of the Corporation. Section 5. Voting Rights. (a) Except as required by applicable law, the Series D1 Preferred Stock shall be entitled to notice of, attend and vote at all general and special meetings of the Corporation as a single class with all other shareholders entitled to notice of, attend and vote at such general or special meetings of the Corporation on the same terms as a holder of Common Stock. At any such general or special meeting, each Holder shall have the number of votes for each share of Series D1 Preferred Stock held by such Holder equal to the whole number of shares of Common Stock into which such share of Series D1 Preferred Stock may be converted pursuant to Section 6 as of the record date for the vote (provided, that the number of fractional shares resulting from the conversion of shares of Series D1 Preferred Stock held by a Holder shall be aggregated for purposes of determining the number of shares of Common Stock for which such Holder is entitled to vote). (b) So long as any shares of Series D1 Preferred Stock are outstanding, in addition to any other vote of shareholders of the Corporation required under applicable law (including, without limitation, the MGCL) or the Charter or Bylaws of the Corporation, the prior approval or written consent, in accordance with the MGCL, the Charter and Bylaws of the Corporation, of the Holders of two-thirds of the outstanding shares of Series D1 Preferred Stock, voting separately as a class, will be required for the Corporation (i) to create, issue, authorize or increase (including by way of a recapitalization) the authorized amount of, or create, issue or authorize any obligation or security convertible into, or exercisable or exchangeable for, or evidencing a right to purchase, any Series D1 Preferred Stock, Parity Shares or Senior Shares except for (x) the issuance of shares of Series E Preferred Stock in satisfaction of the 2007 Section 858 Dividend, (y) the issuance of shares of Series D1 Preferred Stock pursuant to the Securities Purchase Agreement, or (z) the issuance of shares of Series D2 Preferred Stock pursuant to the Standby Purchase Agreement or upon conversion of Series D1 Preferred Stock into Series D2 Preferred Stock, (ii) to approve or make any amendment to the terms of the Series D1 Preferred Stock or these Articles Supplementary, (iii) to amend, alter, change, repeal or waive any provision of the Charter or Bylaws of the Corporation, if such amendment, alteration, change, repeal or waiver adversely affects the rights of the Series D1 Preferred Stock, (iv) to 4 

 reclassify any authorized shares of the Corporation into any Series D1 Preferred Stock, Parity Shares, Senior Shares, or any obligation or security convertible into or, exercisable or exchangeable for, or evidencing a right to purchase any, Series D1 Preferred Stock, Parity Shares or Senior Shares, (v) to consummate any transaction that could or could reasonably be expected to, individually or in the aggregate, adversely affect or impair the rights, privileges or preferences of the Holders of the Series D1 Preferred Stock in such capacity; or (vi) to enter into any contract, agreement, commitment or understanding with respect to any of the foregoing; provided that no approval or written consent under this Section 5(b) shall be required for a one to four reverse stock split of the Common Stock in accordance with applicable laws. Section 6. Conversion of Series D1 Preferred Stock into Common Stock. The Series D1 Preferred Stock may be converted into Common Stock as follows (the "Conversion Rights"): (a) Holder's Right to Convert. Subject to Section 6(d), each share of Series D1 Preferred Stock shall be convertible, at the option of the Holder thereof, at any time and from time to time, into a number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Adjusted Stated Value of such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. (b) Corporation's Right to Convert. If the Shareholder Vote is not obtained by the Corporation, at any time on or after the three-year anniversary of the Issue Date, (i) the Common Stock is Publicly Traded as of the date the Corporation delivers a Forced Conversion Announcement and (ii) the Closing Sale Price of the Common Stock exceeds 200% of the then existing Conversion Price for 40 of the 50 consecutive Trading Days preceding the date of delivery by the Corporation of the Forced Conversion Announcement, then the Corporation may elect to cause all (but not less than all) of the outstanding shares of Series D1 Preferred Stock to be converted into a number of fully paid and nonassessable shares of Common Stock determined by dividing, with respect to each share of Series D1 Preferred Stock, the Adjusted Stated Value of such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Any election to convert pursuant to this Section 6(b) shall be made by public announcement thereof (a "Forced Conversion Announcement"). (c) Mandatory Conversion. If the Shareholder Vote is not obtained by the Corporation, then on the ninth anniversary of the Issue Date, each share of Series D1 Preferred Stock shall automatically be converted into a number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Adjusted Stated Value for such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on such ninth anniversary date. (d) Mechanics of Conversion. Before any holder of Series D1 Preferred Stock in certificated form shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series D1 Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state 5 

 therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. Before any holder of Series D1 Preferred Stock in book-entry form shall be entitled to convert the same into shares of Common Stock, he shall comply with the procedures of the depositary for the shares of Series D1 Preferred Stock held by such Holder. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series D1 Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the full number of shares of Common Stock to which such holder shall be entitled as aforesaid. In case any Series D1 Preferred Stock share certificate shall be surrendered for partial conversion, the Corporation shall execute and deliver to the Holder of the Series D1 Preferred Stock so surrendered, without charge to such Holder, a new share certificate in an aggregate Adjusted Stated Value equal to the unconverted portion of the surrendered certificate. Such conversion shall be deemed to have been made immediately prior to the close of business on the date on which the requirements set forth in this Section 6(d) have been satisfied, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act, the conversion may, at the option of any holder tendering such Series D1 Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive Common Stock upon conversion of such Series D1 Preferred Stock shall not be deemed to have converted such Series D1 Preferred Stock until immediately prior to the closing of such sale of securities. (e) Conversion Price Adjustments of Series D1 Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series D1 Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If at any time the Corporation should issue (or be deemed to issue) any Additional Stock without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such Additional Stock, the Conversion Price in effect immediately prior to each such issuance shall be adjusted pursuant to this Section 6(e)(i), as follows: the new Conversion Price shall be the result of (A) (i) the total number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Stock (on a fully-diluted basis assuming exercise, conversion or exchange of all outstanding exercisable, convertible or exchangeable securities of the Corporation) ("Outstanding Common") multiplied by the applicable Conversion Price in effect prior to the issuance of such Additional Stock, plus (ii) the net aggregate amount of the consideration received by the Corporation for such Additional Stock, divided by (B) the number of shares of Outstanding Common plus the number of shares of such Additional Stock so issued. (B) No adjustment of the Conversion Price for the Series D1 Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving 6 

 rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in Sections 6(e)(i)(E)(3) and 6(e)(i)(E)(4), no adjustment of such Conversion Price pursuant to this Section 6(e)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid or payable therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Issue Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 6(e)(i) and Section 6(e)(ii): 1. The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 6(e)(i)(C) and 6(e)(i)(D)), if any, received or receivable by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. In case any such options to purchase or rights to subscribe for Common Stock shall be issued in connection with the issue or sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such options or rights by the parties thereto, such options and/or rights shall be deemed to have been issued without consideration (except to the extent consideration is payable to the Corporation upon the exercise of such options or rights). 2. The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange 7 

 (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received or receivable by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 6(e)(i)(C) and 6(e)(i)(D)). In case any such convertible or exchangeable securities shall be issued in connection with the issue or sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such convertible or exchangeable securities by the parties thereto, such convertible and/or exchangeable securities shall be deemed to have been issued without consideration (except to the extent consideration is payable to the Corporation upon conversion or exchange of such securities or upon the exercise of any related options or rights). 3. In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series D1 Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. 4. Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series D1 Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related 8 

 to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. 5. The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Sections 6(e)(i)(E)(1) and 6(e)(i)(E)(2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section 6(e)(i)(E)(3) or 6(e)(i)(E)(4). Anything in this Section 6(e)(i) to the contrary notwithstanding, no adjustment to the Conversion Price shall be made pursuant to this Section 6(e)(i) unless the Shareholder Vote has been obtained. If the Shareholder Vote is obtained, then the Conversion Price for a share of Series D1 Preferred Stock will be automatically adjusted as of the date the Shareholder Vote is obtained to take into account all issuances (or deemed issuances) of Additional Stock, if any, that were made prior to the date the Shareholder Vote was obtained and which would have a resulted in an adjustment to the Conversion Price of such share of Series D1 Preferred Stock under this Section 6(e)(i) if the Shareholder Vote had been obtained as of the date of such issuance (or deemed issuance). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 6(e)(i)(E)) by the Corporation after the Issue Date) other than: (A) Common Stock issued pursuant to a transaction described in Section 6(e)(iii) hereof; (B) Shares of Common Stock issued or issuable to employees, consultants or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors; (C) Shares of Common Stock issued or issuable upon conversion of the Series D1 Preferred Stock or the Series D2 Preferred Stock; and (D) Shares of Series E Preferred Stock or shares of Common Stock, issued in satisfaction of the 2007 Section 858 Dividend and shares of Common Stock issued upon conversion of such shares of Series E Preferred Stock. (iii) In the event the Corporation should at any time or from time to time after the date Articles Supplementary containing the terms of the Series D1 Preferred Stock are first filed with the State Department of Assessments and Taxation of Maryland, fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock 9 

 (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock Issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series D1 Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series D1 Preferred Stock shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section 6(e)(i)(E); provided that this Section 6(e)(iii) shall not be applicable to any dividend or other distribution that is actually paid to the Holders of Series D1 Preferred Stock pursuant to Section 3(b). (iv) If the number of shares of Common Stock outstanding at any time after the Issue Date is decreased by a combination of the outstanding shares of Common Stock, then, following the date of such combination, the Conversion Price for the Series D1 Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in these Articles Supplementary) provision shall be made so that the holders of the Series D1 Preferred Stock shall thereafter be entitled to receive upon conversion of such Series D1 Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 6 with respect to the rights of the holders of such Series D1 Preferred Stock after the recapitalization to the end that the provisions of this Section 6 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of such Series D1 Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (g) No Impairment. The Corporation will not, by amendment of its Charter or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Series D1 Preferred Stock against impairment. The Corporation shall, as a condition precedent to any such reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or other voluntary action, cause any successor to the Corporation or acquiring person or entity, as the case may be, to issue convertible preferred stock to each Holder of Series D1 Preferred Stock with preferences, conversion and other rights, powers, restrictions, limitations, qualifications and terms and conditions as nearly equivalent as may be practicable to those contained in these 10 

 Articles Supplementary, including the right to convert such preferred stock into the kind and amount of shares and other securities and property which the Holder would have owned or have been entitled to receive after the happening of any such reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action had such Holder converted its Series D1 Preferred Stock into Common Stock immediately prior to such action. Without limitation of the foregoing, such preferred stock shall provide for adjustments in respect of such shares of stock and other securities and property, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 6(e). The provisions of this Section 6(g) will similarly apply to successive reorganizations, recapitalizations, transfers of assets, consolidations, mergers, dissolutions, issuances or sales of securities or other voluntary actions. (h) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series D1 Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded upward to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series D1 Preferred Stock the Holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series D1 Preferred Stock pursuant to this Section 6, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each Holder of such Series D1 Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any Holder of Series D1 Preferred Stock, furnish or cause to be furnished to such Holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for the Series D1 Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of the Series D1 Preferred Stock. (iii) All adjustments to the Conversion Price shall be calculated to the nearest one one-thousandth (1/1000) of a cent. (i) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each Holder of Series D1 Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times keep available out of its authorized but unissued shares of Common Stock, solely for 11 

 the purpose of effecting the conversion of the shares of the Series D1 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of such series of Series D1 Preferred Stock (assuming that a sufficient number of shares of Series D1 Preferred Stock have been converted into Common Stock and have become available for issuance pursuant to Section 11(g) prior to the conversion of the remaining shares of Series D1 Preferred Stock); and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series D1 Preferred Stock, in addition to such other remedies as shall be available to the holder of Series D1 Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to (i) obtain the requisite stockholder approval of any necessary amendment to the Charter of the Corporation or (ii) consummate a reverse stock split. (k) Payment of Dividends on Converted Shares of Series D1 Preferred Stock. The Corporation shall remain liable to pay to Holders of Series D1 Preferred Stock any accumulated and unpaid dividends on shares of Series D1 Preferred Stock, notwithstanding the conversion of such shares of Series D1 Preferred Stock into Common Stock or Series D2 Preferred Stock and notwithstanding the failure of such Holder to be a holder of record of shares of Series D1 Preferred Stock on any prior Dividend Payment Date or Dividend Record Date during the period in which such dividends accumulated. The Corporation shall pay all accumulated but unpaid dividends on Series D1 Preferred Stock that has been converted into Series D2 Preferred Stock or Common Stock on the first Dividend Payment Date declared by the Board of Directors occurring after the conversion of such shares of Series D1 Preferred Stock into Common Stock or Series D2 Preferred Stock and on each subsequent Dividend Payment Date until all accumulated dividends on such shares have been paid in full. Section 7. Conversion of Series D1 Preferred Stock into Series D2 Preferred Stock. (a) Automatic Conversion. On the second anniversary of the Issue Date, each share of Series D1 Preferred Stock shall automatically be converted into fully paid and nonassessable shares of Series D2 Preferred Stock having an initial stated value equal to the Adjusted Stated Value of each share of Series D1 Preferred Stock so converted; provided, however, that the shares of Series D1 Preferred Stock shall not convert on such second anniversary date if the Shareholder Vote has not been obtained on or prior to such second anniversary date, in which case the shares of Series D1 Preferred Stock shall remain shares of Series D1 Preferred Stock and will convert into shares of Series D2 Preferred Stock automatically on the date the Shareholder Vote is obtained. Each such share of Series D1 Preferred Stock will automatically be entitled to the benefit of each adjustment to the conversion price of the Series D2 Preferred Stock that preceded such conversion from time to time after the date Articles Supplementary containing the terms of the Series D2 Preferred Stock are first filed with the State Department of Assessments and Taxation of Maryland (the "Series D2 Filing Date"). 12 

 (b) Reservation of Stock Issuable Upon Conversion. From and after the Series D2 Filing Date, the Corporation shall at all times keep available out of its authorized but unissued shares of Series D2 Preferred Stock, solely for the purpose of effecting the conversion of the shares of the Series D1 Preferred Stock, such number of its shares of Series D2 Preferred Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of such series of Series D1 Preferred Stock; and if at any time the number of authorized but unissued shares of Series D2 Preferred Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series D1 Preferred Stock, in addition to such other remedies as shall be available to the holder of Series D1 Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Series D2 Preferred Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to (i) obtain the requisite stockholder approval of any necessary amendment to the Charter of the Corporation or (ii) to consummate a reverse stock split. Section 8. Notices. When the Corporation is required, pursuant to these Articles Supplementary, to give notice to Holders without specifying the method of giving such notice, the Corporation shall do so by sending notice via first class mail or by overnight courier to the Holders of record as of a reasonably current date selected by the Board of Directors in its sole discretion at their respective addresses as they appear on the books and records of the Corporation. Section 9. Transfer Restrictions. (a) Certain Definitions. As used in this Section 9: "5-Percent Stockholder" means a "5-percent shareholder" of the Corporation as defined in Treasury Regulation Section 1.382-2T(g). "Completion" occurs, and a Transfer is "Completed," when all steps have been taken to effect the Transfer of beneficial ownership. "Entity" means an entity within the meaning of Treasury Regulation Section 1.382-3(a)(l). "IRC" means the Internal Revenue Code of 1986, as amended from time to time. "Notice Date" means a testing date (as described in Treasury Regulation Section 1.382-2(a)(4)) on which the aggregate Percentage Stock Increases are equal to or greater than the Threshold Percentage less ten percentage points. "Percentage Stock Increase" means on any testing date (as defined in Treasury Regulation Section 1.382-2(a)(4)) the increase in the Percentage Stock Ownership of Stock of the Corporation by a 5-Percent Stockholder over the lowest Percentage Stock Ownership of Stock of the Corporation by such 5-Percent Stockholder at any time during the testing period (as defined in Section 382(i) of the Code). For this purpose, Treasury Regulation Section 1.382-2T(g)(5)(i)(A) shall apply in determining the Percentage Stock Increase of any 5-Percent Stockholder. 13 

 "Percentage Stock Ownership" means percentage stock ownership of Stock of the Corporation determined in accordance with the Treasury Regulations under Section 382 of the IRC. "Prohibited Transfer" means a purported Substantial Stockholder Transfer, but only to the extent that such Transfer is null and void ab initio under Section 9(b) or Section 9(c). "Restriction Notice" means a written notice provided by the Corporation to a potential Transferee, prior to 5:00 p.m. (New York time) on the fifth Business Day following the day of receipt by the Corporation of a Transfer Notice, which written notice states that the Corporation believes that a Restriction Period either has or has not commenced and, if it has, that the Termination Date either has or has not occurred. "Restriction Period" means a period: (1) beginning on a testing date (as described in Treasury Regulation Section 1.382-2(a)(4)), on which the aggregate Percentage Stock Increases of all 5-Percent Stockholders on such testing date (taking into account all pending Transfers) equals or exceeds the Threshold Percentage; and (2) ending on the earliest date on which the Board of Directors determines that (a) an ownership change (within the meaning of section 382 of the IRC) would not result in a substantial limitation on the ability of the Corporation (or a direct or indirect subsidiary of the Corporation) to use otherwise available Tax Benefits, or (b) no significant value attributable to Tax Benefits would be preserved by continuing the Transfer restrictions herein (the earliest of the dates described in this clause (2) being hereafter referred to as the "Termination Date"). "Stock" means stock as that term is used in Section 382(k)(6)(A) of the IRC. "Substantial Stockholder" means an individual or Entity that acquires or, if the Transfer Restrictions or the Notice Restrictions are then applicable, that purports to acquire direct beneficial ownership of Series D1 Preferred Stock in a Substantial Stockholder Transfer. "Substantial Stockholder Transfer" means a Transfer that results in a Percentage Stock Increase or, if the Transfer Restrictions or the Notice Restrictions are then applicable, that would result in a Percentage Stock Increase if it occurred and were not void ab initio. "Tax Benefits" means net operating loss carryovers (as defined in Section 172(b)(2) of the IRC) and net unrealized built-in loss (as defined in Section 382(h)(1)(B) of the IRC). "Threshold Percentage" means 40%. "Transfer" means any direct or indirect sale, transfer, exchange, issuance, grant, redemption, repurchase assignment, conveyance or other disposition for consideration, whether voluntary or involuntary, and whether by operation of law or otherwise, but not including an issuance, grant, redemption or repurchase of Series D1 Preferred Stock. 14 

 "Transferee" means any individual or Entity to whom direct beneficial ownership of Stock is Transferred and who is, or would become as a result of such Transfer, a Substantial Stockholder. "Transfer Notice" means a written notice provided by a Substantial Stockholder to the Corporation, at least seven and not more than twelve Business Days prior to Completion of a Substantial Stockholder Transfer, which notice states (i) the name, address, facsimile number and e-mail address, and Percentage Stock Ownership of the Substantial Stockholder prior to the Substantial Stockholder Transfer, (ii) if known to the Substantial Stockholder, the name and address of the transferor, (iii) the number of shares subject to the Substantial Stockholder Transfer, and (iv) the proposed date of Completion of the Substantial Stockholder Transfer. For purposes of this definition, if a Substantial Stockholder does not exist with respect to a Substantial Stockholder Transfer, then the Transfer Notice shall be provided by the individual or Entity that purports to engage in the Transfer that will cause the Substantial Stockholder Transfer. "Treasury Regulation" means a Treasury Regulation promulgated under the IRC. (b) Transfer Restrictions. Unless specifically waived by the Board of Directors, a Substantial Stockholder Transfer that is Completed during a Restriction Period shall be null and void ab initio and shall not be effective to Transfer Series D1 Preferred Stock, but only to the extent necessary to prevent the Transfer from being a Substantial Stockholder Transfer (the "Transfer Restrictions"). With respect to a transaction entered into through the facilities of any national securities exchange or any national securities quotation system, the sole remedy pursuant to this Section 9(b) shall be the recovery of the Prohibited Transfer as described in Section 9(d). The term "beneficial" used in this paragraph shall mean beneficial ownership for U.S. federal income tax purposes. (c) Notice and Permitted Transfers. No Transfer Notice is required for Transfers that occur prior to issuance by the Corporation of a Notice Date Press Release (defined below). A Substantial Stockholder Transfer that is Completed shall be null and void ab initio unless a Transfer Notice is provided to the Corporation (the "Notice Restriction"). If the Corporation receives a Transfer Notice on a day that is not in a Restriction Period (taking into account all prior Transfers (i) for which a previous Transfer Notice was received by the Corporation, (ii) for which a Schedule 13D or Schedule 13G was theretofore filed, or (iii) of which the Corporation was otherwise previously aware) and the Transfer Notice references a Substantial Stockholder Transfer that, upon Completion, would cause a Restriction Period to commence, such Transfer shall be treated as a Prohibited Transfer to the extent necessary for a Restriction Period not to commence. If the Corporation receives more than one such Transfer Notice on the same day, the Transfers referenced in such Transfer Notices shall be treated as Prohibited Transfers to the extent necessary for a Restriction Period not to commence, and the amount of the Stock referenced in each Transfer Notice that is treated as Prohibited Stock shall be in proportion to the amounts of Stock referenced in each such Transfer Notice. The Corporation shall provide a Restriction Notice to each Substantial Stockholder that files a Transfer Notice. The determination of whether a Transfer referenced in a Transfer Notice is a Prohibited Transfer is made on the date the Transfer Notice is received by the Corporation. From and after receipt of a Transfer Notice until Completion of the Transfer described in such 15 

 Transfer Notice (and thereafter to the extent such Transfer is Completed and is not a Prohibited Transfer), the determination of whether a Restriction Period has commenced with respect to any other Transfer (i) for which a Transfer Notice was not theretofore received by the Corporation, (ii) for which a Schedule 13D or Schedule 13G was not theretofore filed, or (iii) of which the Corporation was not otherwise previously aware, shall be made by taking into account the Percentage Stock Increase referenced in such Transfer Notice (or if Completion has occurred, the Percentage Stock Increase that resulted from that part of the Transfer referenced in such Transfer Notice that was not a Prohibited Transfer). (d) Recovery of Prohibited Transfers. The Corporation may institute legal proceedings to force rescission of a Prohibited Transfer. Notwithstanding the preceding sentence, the sole remedy with respect to a Prohibited Transfer entered into through the facilities of any national securities exchange or any national securities quotation system shall be as provided below. Upon written demand by the Corporation, the purported Transferee or member of a Prohibited Party Group (as defined below) with respect to a Prohibited Transfer shall deliver or cause to be delivered to an agent designated by the Board of Directors (the "Securities Transfer Agent"), all certificates and other evidences of ownership of the Stock that is the subject of the Prohibited Transfer (the "Prohibited Stock"), together with any dividends or other distributions that were received from the Corporation with respect to such Prohibited Stock ("Prohibited Distributions"). The Securities Transfer Agent promptly shall sell the Prohibited Securities to one or more buyers. Disposition of Prohibited Stock by the Securities Transfer Agent shall be deemed to occur simultaneously with the Prohibited Transfer to which the Prohibited Stock relates. The Securities Transfer Agent shall not act or be treated as acting as an agent for or on behalf of the purported Transferee or Prohibited Party Group or for or on behalf of the Corporation and shall have no right to bind any of them, in contract or otherwise, but shall act only to carry out the ministerial functions assigned to it in these Transfer Restrictions. If a purported Transferee or member of a Prohibited Party Group has resold Prohibited Stock before receiving the Corporation's demand to surrender the Prohibited Stock to the Securities Transfer Agent, the purported Transferee or member of a Prohibited Party Group shall be deemed to have sold the Prohibited Stock on behalf of the Securities Transfer Agent and shall be required to Transfer to the Securities Transfer Agent any Prohibited Distributions and the proceeds of such sale of Prohibited Stock. If a purported Transferee or member of a Prohibited Party Group fails to surrender Prohibited Stock or proceeds of a sale of Prohibited Stock to the Securities Transfer Agent, together with any Prohibited Distributions, within three Business Days from the date the Corporation makes a demand for surrender of such Prohibited Stock, the Corporation may institute legal proceedings to compel such surrender. If a Prohibited Transfer occurs, but does not result from a Transfer of direct beneficial ownership of Stock, each individual or Entity whose ownership of Stock is attributed to the 5-Percent Stockholder that had a Percentage Stock Increase (collectively, the "Prohibited Party Group") shall be required to deliver, and shall be deemed to have delivered to the Securities Transfer Agent, prior to the Transfer, a sufficient number of shares of Stock (which Stock shall be so delivered in the inverse order in which it was acquired by members of the Prohibited Party Group) to cause the Transfer, following such delivery, not to be a Prohibited Transfer. (e) Treatment of Prohibited Transfers and Prohibited Stock. No employee or agent of the Corporation shall record any Prohibited Transfer and the purported Transferee shall not be recognized as a stockholder of Prohibited Stock for any purpose whatsoever and shall not 16 

 be entitled, with respect to such Prohibited Stock, to any rights of a stockholder of the Corporation, including, without limitation, the right to vote such Prohibited Stock or to receive dividend distributions, whether liquidating or otherwise, in respect thereof. Once Prohibited Stock has been acquired in a Transfer that is not a Prohibited Transfer, the Prohibited Stock shall cease to be Prohibited Stock. (f) Proceeds of Prohibited Transfers. The Securities Transfer Agent shall apply any proceeds of a sale by it of Prohibited Stock (or, if the purported Transferee resold the Prohibited Stock before the Securities Transfer Agent could recover the Prohibited Stock from the Purported Transferee, the proceeds from such resale of Prohibited Stock by the Purported Transferee), as follows: (a) first, to reimburse itself for its costs and expenses in connection with its duties as Securities Transfer Agent hereunder; (b) second, from such proceeds as well as other funds available in the Prohibited Transfers Fund, to reimburse the purported Transferee for the amounts paid by the purported Transferee for the Prohibited Stock, and (c) third, to pay any remaining balance of such proceeds into a fund (the "Prohibited Transfers Fund") that will hold all excess proceeds from sales of Prohibited Stock. The Securities Transfer Agent shall be the disbursing agent of the Prohibited Transfers Fund, and such fund shall be used to reimburse purported Transferees for the amounts paid by the purported Transferees for Prohibited Stock. At the end of a Restriction Period, any remaining amounts in the Prohibited Transfers Fund shall be paid to the U.S. Treasury Department. (g) Amendment of Transfer Restrictions. An affirmative vote of two-thirds of the holders of Series D1 Preferred Stock shall be required to amend this Section 9 if such amendment would impose additional restrictions, burdens or requirements on any Transfer of Series D1 Preferred Stock. (h) Legend on Certificates. All certificates reflecting Series D1 Preferred Stock, until the end of a Restriction Period, bear a conspicuous legend in substantially the following form: THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO RESTRICTION PURSUANT TO SECTION 9 OF THE ARTICLES SUPPLEMENTARY FOR THE 9.00% SERIES D1 MANDATORY CONVERTIBLE PREFERRED STOCK OF THE CORPORATION, AS AMENDED AND IN EFFECT FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION UPON REQUEST. (i) Press Releases. Within five (5) Business Days after the Corporation determines that a Notice Date has occurred, the Corporation shall issue a press release stating that fact and stating that the Transfer Notice requirements of this Section 9 have therefore become operative (the "Notice Date Press Release"). Within five (5) Business Days after the Corporation determines that a Restriction Period has commenced, the Corporation shall issue a press release stating such fact. (j) Administration of Transfer Restrictions. The Board of Directors shall have the power to determine, in its sole discretion, all matters related to this Section 9, including 17 

 matters necessary or desirable to administer, to waive or to determine compliance with this Section 9. Section 10. Definitions. (a) "2007 Section 858 Dividend" means the dividend issued by the Corporation in calendar year 2007 in order to satisfy the Corporation's obligation to distribute the Corporation's calendar year 2006 real estate investment trust taxable income in order to maintain its status as a real estate investment trust. (b) "Additional Stock" has the meaning set forth in Section 6(e)(ii). (c) "Adjusted Stated Value" means the Initial Stated Value per share of Series D1 Preferred Stock, as adjusted from time to time for any Extraordinary Stock Event. (d) "Board of Directors" has the meaning set forth in Section 2. (e) "Business Day" means any day other than a Saturday or Sunday or any other day on which banks in the City of New York are authorized or required by law or executive order to close. (f) "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents however designated of corporate stock, capital stock or other equity participations, including partnership interests (whether general or limited), membership interests or other equivalents (however designated), of such Person and any rights, warrants, options or other securities to acquire an equity interest in such Person. (g) "Charter" means the Charter of the Corporation, as amended, restated or supplemented from time to time. (h) "Closing Sale Price" on any date means the closing sale price per share (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that date as reported in the composite transactions for the principal U.S. national securities exchange on which the Common Stock is traded or, if the Common Stock is not listed on a U.S. national securities exchange, as reported by the NASDAQ Stock Market. If the Common Stock is not listed for trading on a U.S. national securities exchange and not reported by the NASDAQ Stock Market on the relevant date, the Closing Sale Price shall be the last quoted bid price for the Common Stock in the over-the-counter market on the relevant date as reported by the OTC Bulletin Board. (i) "Common Stock" has the meaning set forth in Section 2. (j) "Common Stock Equivalents" has the meaning set forth in Section 6(e)(iii). (k) "Conversion Price" means $7.00 per share of Series D1 Preferred Stock, subject to adjustment from time to time pursuant to Section 6(e). 18 

 (l) "Conversion Price Adjustment Provisions" means the provisions of Section 6(e)(i) hereof and, from and after the Series D2 Filing Date, the corresponding provision in the Articles Supplementary setting forth the terms of the Series D2 Preferred Stock. (m) "Conversion Rights" has the meaning set forth in Section 6. (n) "Corporation" means Novastar Financial, Inc., a Maryland corporation. (o) "Dividend Payment Date" has the meaning set forth in Section 3(a). (p) "Dividend Rate" has the meaning set forth in Section 3(a). (q) "Dividend Record Date" has the meaning set forth in Section 3(a). (r) "Extraordinary Stock Event" means any stock split or combination of shares of Series D1 Preferred Stock. (s) "Forced Conversion Announcement" has the meaning set forth in Section 6(b). (t) "Holder" means the Person in whose name a share of Series D1 Preferred Stock is registered. (u) "Initial Stated Value" means $25.00 per share of Series D1 Preferred Stock. (v) "Issue Date" means the first date on which shares of Series D1 Preferred Stock are first issued. (w) "Investors" means MassMutual Capital Partners LLC, Jefferies Capital Partners IV LP, Jefferies Employee Partners IV LLC, and JCP Partners IV LLC. (x) "Junior Shares" has the meaning set forth in Section 2. (y) "Liquidation Event" has the meaning set forth in Section 4(a). (z) "Liquidation Preference" has the meaning set forth in Section 4(a). (aa) "MGCL" means the Maryland General Corporation Law. (bb) "Outstanding Common" has the meaning set forth in Section 6(e). (cc) "Parity Shares" has the meaning set forth in Section 2. (dd) "Person" means any individual, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. 19 

 (ee) "Publicly Traded" means, with respect to the Common Stock, that the Common Stock is (i) listed on a U.S. national securities exchange, (ii) quoted on NASDAQ or (iii) traded in the domestic over-the-counter market, which trades are reported by the OTC Bulletin Board. (ff) "Rights Offering" means a rights offering in connection with which holders of record of Common Stock and holders of record of Series D1 Preferred Stock will be entitled to receive a distribution from the Corporation of non-transferable rights to subscribe for and purchase from the Corporation shares of Series D2 Preferred Stock and certain holders of Series D1 Preferred Stock will have the obligation to purchase shares of Series D2 Preferred Stock that are not purchased pursuant to such rights, all as further described in (i) Section 2.5 of the Securities Purchase Agreement and (ii) Section 2 and Exhibit A of the Standby Purchase Agreement. (gg) "Securities Act" means the Securities Act of 1933, as amended. (a) "Securities Purchase Agreement" means the Securities Purchase Agreement dated as of July 16, 2007, by and among the Corporation and the Investors, as amended, supplemented or otherwise modified from time to time. (b) "Series C Preferred Stock" has the meaning set forth in Section 2. (c) "Series D1 Preferred Stock" has the meaning set forth in Section 1. (d) "Series D2 Filing Date" has the meaning set forth in Section 7(b). (e) "Series D2 Preferred Stock" has the meaning set forth in Section 2. (f) "Series E Preferred Stock" has the meaning set forth in Section 2. (g) "Senior Shares" has the meaning set forth in Section 2. (h) "Shareholder Vote" means the vote or written consent of the requisite shareholders of the Corporation in accordance with the MGCL, the Charter and Bylaws of the Corporation and the rules and regulations of the New York Stock Exchange approving both Conversion Price Adjustment Provisions. (i) "Standby Purchase Agreement" means the Standby Purchase Agreement dated as of July 16, 2007, by and among the Corporation and the Investors, as amended, supplemented or otherwise modified from time to time. (j) "Subsidiary" means, with respect to any Person as of any time of determination, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership or limited liability company (A) a majority of the general partners or the managing general partner (in the case of 20 

 any partnership), or a majority of the managers or the sole managing member or manager (in the case of a limited liability company), of which is at such time such Person or a Subsidiary of such Person or (B) the only general partners (in the case of any partnership), or the only managing members or managers (in the case of a limited liability company), of which are at such time such Person or of one or more Subsidiaries of such Person (or any combination thereof). (k) "Trading Day" means a day during which (i) trading in Common Stock generally occurs and (ii) a Closing Sale Price for the Common Stock is provided on The New York Stock Exchange or, if the Common Stock is not listed on The New York Stock Exchange, on the principal other U.S. national securities exchange on which the Common Stock is then listed or, if the Common Stock is not listed on a U.S. national securities exchange, on NASDAQ, or if the Common Stock is not quoted on NASDAQ, on the OTC Bulletin Board. Section 11. Miscellaneous. (a) The Corporation covenants that any shares of Common Stock issued upon conversion of the Series D1 Preferred Stock or issued in respect of a share dividend payment shall be validly issued, fully paid and non-assessable, and issued in compliance with all federal and state laws. (b) The Corporation shall pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Series D1 Preferred Stock or shares of Common Stock or other securities or property issued or distributed in respect of shares of the Series D1 Preferred Stock pursuant hereto. (c) The shares of Series D1 Preferred Stock are perpetual and not redeemable, other than as set forth in Articles Supplementary containing the terms of the Series D1 Preferred Stock. (d) Whenever possible, each provision hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. If a court of competent jurisdiction should determine that a provision hereof would be valid or enforceable if a period of time were extended or shortened or a particular percentage were increased or decreased, then such court may make such change as shall be necessary to render the provision in question effective and valid under applicable law. (e) The headings of the various sections and subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. (f) If any of the voting powers, preferences and relative, participating, optional and other special rights of the Series D1 Preferred Stock and qualifications, limitations and restrictions thereof set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series D1 Preferred Stock and qualifications, limitations and restrictions thereof set forth herein which can be given effect without the invalid, 21 

 unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series D1 Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series D1 Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series D1 Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. (g) Shares of Series D1 Preferred Stock that have been issued and reacquired by the Corporation in any manner, including Series D1 Preferred Stock purchased or converted, shall be returned to the status of authorized but unissued shares of Common Stock. (h) If any certificate for Series D1 Preferred Stock shall be mutilated, lost, stolen or destroyed, the Corporation shall issue, in exchange and in substitution for and upon cancellation of the mutilated certificate for Series D1 Preferred Stock, or in lieu of and substitution for the certificate for Series D1 Preferred Stock lost, stolen or destroyed, a new certificate for Series D1 Preferred Stock of like tenor and representing an equivalent amount of Series D1 Preferred Stock, but only upon receipt of evidence of such loss, theft or destruction of such certificate for Series D1 Preferred Stock and indemnity, if requested, satisfactory to the Corporation. (i) The Corporation shall not, by amendment of its Charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series D1 Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all terms and in the taking of all action that may be necessary or appropriate in order to protect the rights of the Holders of then outstanding Series D1 Preferred Stock against dilution or other impairment. Without limiting the generality of the foregoing, the Corporation (i) shall not increase the par value of any shares of stock receivable on the conversion of Series D1 Preferred Stock above the amount payable therefor on such conversion and (ii) shall take all action that may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares on the conversion of all Series D1 Preferred Stock from time to time outstanding. (j) The remedies provided in the terms of the Series D1 Preferred Stock shall be cumulative and in addition to all other remedies available under terms of the Series D1 Preferred Stock, at law or in equity (including a decree of specific performance and/or other injunctive relief). No remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy. Nothing herein shall limit a Holder's right to pursue actual damages for any failure by the Corporation to comply with the terms of these Articles Supplementary. The Corporation covenants to each Holder of Series D1 Preferred Stock that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Corporation (or the performance thereof). The Corporation acknowledges that a breach by it of its obligations 22 

 hereunder will cause irreparable harm to the Holders of the Series D1 Preferred Stock and that the remedy at law for any such breach may be inadequate. The Corporation therefore agrees that, in the event of any such breach or threatened breach, the Holders of the Series D1 Preferred Stock shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. (k) No failure or delay on the part of a Holder of Series D1 Preferred Stock in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. (l) The shares of Series D2 Preferred Stock are subject to the provisions of Article XI of the Charter. (m) No Holder of shares of Series D1 Preferred Stock shall be entitled to exercise the rights of an objecting stockholder under Title 3, Subtitle 2 of the MGCL or any successor provision. (n) Except for any amendment described in Section 5(b), the terms and conditions set forth in these Articles Supplementary may be amended, modified or waived upon the approval of holders of Capital Stock of the Corporation required by the MGCL. THIRD: The shares of Series D1 Preferred Stock have been classified and designated by the Board of Directors under the authority contained in the Charter. FOURTH: These Articles Supplementary have been approved by the Board of Directors in the manner and by the vote required by law. FIFTH: The undersigned Chairman and Chief Executive Officer acknowledges these Articles Supplementary to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned Chairman and Chief Executive Officer acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. * * * 23 

 IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary to be signed in its name and on its behalf by its Chairman and Chief Executive Officer and attested by its Secretary on this 16th day of July, 2007. ATTEST: NOVASTAR FINANCIAL, INC. /s/ Jeffrey D. Ayers By: /s/ Scott F. Hartman (SEAL) - ------------------------------- ---------------------------------- Jeffery D. Ayers Scott F. Hartman Secretary Chairman and Chief Executive Officer