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Our Ref: CO2 ASX Announce Notice of General Meeting and Proxy Form (307)

2 August 2011

ANNOUNCEMENT 307

Company Announcements Office
Australian Stock Exchange
Level 4
20 Bridge Street
SYDNEY NSW 2000

By ASX Online
Number of pages: 71
(including this page)

Dear Sir

Re: Notice of General Meeting & Proxy

Enclosed are the following CO2 Group Limited documents which will be sent to shareholders today:
- Notice of General Meeting with supporting Explanatory Memorandum; and
- Pro forma Proxy Form.

The Notice of General Meeting and attachments are included on the Company’s web site www.co2australia.com.au.

The Company’s General Meeting will be held on Wednesday 31 August 2011 at 10.30 am.

Yours faithfully

Harley Whitcombe
Company Secretary

ENC

CO2 Group Limited
Level 11, 225 St Georges Terrace Perth WA 6000
PO Box 7312 Cloisters Square Perth WA 6850
Tel. 08 9321 4111
Fax. 08 9321 4411
ABN 50 009 317 846
www.co2australia.com.au

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CO2 Group Limited

ABN 50 009 317 846

NOTICE OF GENERAL MEETING

AND

EXPLANATORY MEMORANDUM

AND

INDEPENDENT EXPERT'S REPORT

A PROXY FORM IS ENCLOSED

Please read the Notice and Explanatory Memorandum carefully.

If you are unable to attend the General Meeting, please complete and return the enclosed Proxy Form in accordance with the specified directions.

Dear Shareholders

Extraordinary General Meeting

The Company has convened an extraordinary shareholders meeting on 31 August 2011 to consider resolutions to:

approve certain proposed refinements to the Company's Employee Incentive Plan;
approve the issue of performance rights under the Company's Employee Incentive Plan to our Chief Executive Officer and Managing Director, Mr Andrew Grant and Executive Director of Corporate Development, Dr Christopher Mitchell; and
authorise the exercise of options held, or to be held, by Avatar Industries, a company controlled by Mr Ian Trahar.

The Company has also taken this opportunity to provide a brief overview of the very positive recent developments in legislation and government policy affecting the carbon industry, which you may find of interest.

Approval of proposed amendments to the Company's Employee Incentive Plan

Following further advice the Company proposes a number of refinements to the Company's Employee Incentive Plan recently approved at the 2010 AGM. Details of these changes are explained in the attached documents.

Issue of performance rights

The Company proposes to issue performance rights under the Company's Employee Incentive Plan to the Company's Managing Director, Mr Andrew Grant and Executive Director of Corporate Development, Dr Christopher Mitchell. With the significant and positive legislative and policy changes in the carbon space in recent weeks, it has become increasingly important to retain and appropriately incentivise these two Executive Directors. It is the Board's view that with renewed interest and focus on carbon industry, it is likely that there will be considerable competition for skills in the area, making retention of key executives a critical component of maintaining the Company's superior competitive position. Given that both Messrs Grant and Mitchell are Directors, the issue of the performance rights to them requires shareholder approval.

Approval for the exercise of Options

The Company is also seeking shareholder approval to authorise the exercise of all of the options held, or to be held, by Avatar Industries, an associate of Gabor Holdings. Gabor Holdings is controlled by Mr Ian Trahar, the Chairman of CO2 Group.

Shareholders will be aware that the Company's listed 12 cent options expire on 12 November 2011. Given the anticipated growth in business following the recent changes in law and policy and the Company's expansion into New Zealand, the exercise of options at that time should provide a welcome addition of cash to fund growth. If all options are exercised the Company will raise $18.6 million. As the options are well "in the money" we are confident that optionholders will exercise the options.

Avatar Industries holds approximately 67.7 million options and has an agreement with Crestpark to acquire a further 22.2 million options. Gabor Holdings' voting power will increase to 47.55% as a result of the exercise of options held by Avatar Industries, assuming all of the listed options held by other shareholders are exercised, which is expected to be the case.

Approval is sought to enable the exercise of options to the extent that they cannot be exercised under the 3% creep in 6 months exemption under the Corporations Act takeover provisions. In this regard, in the unlikely event that a large number of optionholders do not exercise their options for some reason, Gabor Holdings may be prevented from exercising some of its existing options and the Crestpark options unless shareholder approval is obtained. To maximise the potential for funds to be raised by exercise of options in all circumstances, the Company is seeking shareholder approval.

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An independent expert report has been obtained in relation to the potential increase in Gabor Holdings' interest resulting from the exercise of options. The independent expert report concludes for the reasons specified in the report that the exercise of options if fair and reasonable to shareholders not associated with Gabor Holdings and its associates.

A detailed explanation of the each resolution and its implications are set out in the attached notice of meeting, explanatory statement and independent expert's report, which we urge you to read in its entirety.

We look forward to seeing you at the shareholders meeting.

Yours faithfully

CO2 Group Limited

Harley Whitcombe
Director

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NOTICE OF GENERAL MEETING

CO2 Group Limited (ABN 50 009 317 846)

Time: 10.30am (WST)
Date: 31 August 2011
Place: Theatrette
Level 2
QV1 Building
250 St Georges Terrace
Perth Western Australia 6000

Notice is given of a General Meeting of CO2 Group Limited (Company or CO2 Group).

This Notice of Meeting is issued by CO2 Group of Level 11, 225 St George's Terrace, Perth, Western Australia.

BUSINESS

The business of the meeting will consist of the following:

ORDINARY BUSINESS

APPROVAL OF THE PROPOSED AMENDMENTS TO THE CO2 GROUP LIMITED EMPLOYEE INCENTIVE PLAN – RESOLUTION 1

To consider, and if thought fit, to pass the following resolution as an ordinary resolution:

"That, the CO2 Group Limited Employee Incentive Plan (Incentive Plan) as amended, be approved by shareholders for the purposes of section 260C(4) of the Corporations Act and for the purposes of ASX Listing Rule 7.2, Exception 9(b) and for all other purposes, as detailed in the Explanatory Memorandum accompanying this Notice of Meeting."

APPROVAL OF THE GRANT OF PERFORMANCE RIGHTS UNDER THE CO2 GROUP LIMITED EMPLOYEE INCENTIVE PLAN TO MR ANDREW GRANT – RESOLUTION 2

To consider, and if thought fit, to pass the following resolution as an ordinary resolution:

"That, for the purposes of ASX Listing Rule 10.14, and for all other purposes, Shareholders approve the allotment and issue of Performance Rights to Mr Andrew William Thorold Grant (or his nominee) under the terms of the Incentive Plan, as detailed in the Explanatory Memorandum accompanying this Notice of Meeting."

APPROVAL OF THE GRANT OF PERFORMANCE RIGHTS UNDER THE CO2 GROUP LIMITED EMPLOYEE INCENTIVE PLAN TO DR CHRISTOPHER MITCHELL – RESOLUTION 3

To consider, and if thought fit, to pass the following resolution as an ordinary resolution:

"That, for the purposes of ASX Listing Rule 10.14, and for all other purposes, Shareholders approve the allotment and issue of Performance Rights to Dr Christopher David Mitchell (or his nominee) under the terms of the Incentive Plan, as detailed in the Explanatory Memorandum accompanying this Notice of Meeting."

APPROVAL OF ISSUE OF SHARES TO GABOR HOLDINGS PTY LTD AND ASSOCIATES – RESOLUTION 4

To consider, and if thought fit, to pass the following resolution as an ordinary resolution:

"That, for the purposes of Section 611 Item 7 of the Corporations Act, and for all other purposes, Shareholders approve the issue of Shares to Gabor Holdings Pty Ltd and its associates (Gabor Holdings) pursuant to the exercise of all Options held or to be held by Avatar Industries Pty Ltd, as detailed in the Explanatory Memorandum accompanying this Notice of Meeting."

VOTING EXCLUSION STATEMENTS

RESOLUTION 1

The Company will disregard any votes cast on Resolution 1 by or on behalf of a Director and an associate of a Director (except a Director who is ineligible to participate in any employee incentive scheme of the Company or any associate of such Director), as required under ASX Listing Rule 7.2 Exception 9(b).

However, the Company need not disregard a vote if:

(a) it is cast by a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form; or
(b) it is cast by the Chairman of the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.

RESOLUTIONS 2 AND 3

The Company will disregard any votes cast on Resolution 2 and 3 by or on behalf of a Director or an associate of a Director (except a Director who is ineligible to participate in any employee incentive scheme of the Company or an associate of such Director), as required under ASX Listing Rule 10.14.

However, the Company need not disregard a vote if:

RESOLUTION 4

The Company will disregard any votes cast on Resolution 4 by Gabor Holdings, and its associates and Crestpark and its associates.

However, the Company need not disregard a vote if:

HOW TO VOTE

How do you exercise your right to vote?

All holders of ordinary shares appearing on the CO2 Group Limited share register at 5.00pm (WST) on 29 August 2011 are entitled to attend and vote at the meeting.

Jointly held shares

If your shares are jointly held, only one of the joint holders is entitled to vote. If more than one holder votes in respect of jointly held shares, only the vote of the holder whose name appears first on the register will be counted. You need not exercise all of your votes in the same way, nor need you cast all of your votes.

Corporations voting

In order to vote at the meeting, a corporation, which is a member, may appoint a person to act as its representative. A representative does not have to be a shareholder of CO2 Group. The appointment should comply with section 250D of the Corporations Act. The representative should bring to the meeting evidence of his or her appointment including any authority under which it is signed. Alternatively, you may appoint a proxy to vote on your behalf.

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Voting by proxy

If you cannot attend, you may appoint a proxy to attend and vote for you. A proxy does not have to be a Shareholder. To ensure that all Shareholders can exercise their right to vote on each proposed resolution, a CO2 Group shareholder proxy form is enclosed with this Notice of General Meeting together with a reply paid envelope.

A Shareholder that is entitled to cast 2 or more votes may appoint 2 proxies and may specify the proportion or number of votes each proxy is appointed to exercise. If no proportion or number is specified, each proxy may exercise half of the Shareholder's votes.

Proxy forms must be deposited at CO2 Group's registry, Computershare Investor Services Pty Limited by using the enclosed reply paid envelope or by posting, delivery or facsimile to:

CO2 Group Limited share registry
Computershare Investor Services Pty Limited
Mail: GPO Box 242
Melbourne Victoria 3001
Australia
Delivery: Level 2, Reserve Bank Building,
45 St George's Terrace, Perth,
Western Australia, 6000
Facsimile: 1800 783 447 (within Australia)
+61 3 9473 2555 (outside Australia)
Enquires: 1300 850 505 (within Australia)
+61 3 9415 4000 (outside Australia)

to be received not less than 48 hours before the time of the meeting, that is, by 10.30am (WST) on 29 August 2011.

The proxy form provides details of what you need to do to appoint a proxy to attend and vote for you.

If you appoint the Chairman of the meeting as your proxy and you do not specifically direct how the Chairman is to vote as your proxy, the Chairman will exercise your votes in favour of the resolutions.

Voting procedure

As ordinary resolutions, Resolutions 1, 2, 3 and 4 will be approved if at least 50% of the votes cast by Shareholders entitled to vote on the resolutions at the meeting are voted in favour of the resolutions.

Under the terms of the CO2 constitution, a poll is to be conducted as directed by the Chairman of the meeting.

By Order of the Board
Harley Whitcombe
Company Secretary
CO2 Group Limited
Dated: 1 August 2011

CO2 GROUP LIMITED
ABN 50 009 317 846

EXPLANATORY MEMORANDUM TO SHAREHOLDERS

INTRODUCTION

This Explanatory Memorandum has been prepared for the information of Shareholders of the Company in connection with the business to be transacted at the General Meeting of the Company to be held on 31 August 2011.

At that meeting, Shareholders will be asked to pass resolutions to:

approve the proposed amendments to the Incentive Plan;
approve the issue of Performance Rights to Mr Andrew Grant and Dr Christopher Mitchell under the Incentive Plan; and
provide what is expected to be a fallback approval to enable Gabor Holdings and its associates to exercise their Options in the unlikely event that a large number of the other optionholders do not exercise their Options.

The purpose of this Explanatory Memorandum is to provide information that the Board believes to be material to Shareholders in deciding whether or not to pass those resolutions. This Explanatory Memorandum should be read in conjunction with the accompanying Notice of General Meeting and Independent Expert's Report.

Capitalised terms used both in the Notice of General Meeting and this Explanatory Memorandum are defined in the Glossary.

CO2 GROUP BACKGROUND

Background

CO2 Group is Australia's market leader in the establishment and management of forest carbon sinks intended for registration under formal emissions reduction schemes and is a provider of environmental services in the climate change sector in Australia. Through its subsidiary, CO2 Australia, the Company currently services large domestic and international companies and state governments, including Origin Energy, Woodside Energy, Inpex Browse, Newmont, Qantas Airways, Eraring Energy, Wannon Water Corporation, ACTEW, City of Sydney and Big Day Out and the Victorian Government. For some time, CO2 Group has been actively broadening the scope of its environmental services to include mine site rehabilitation, broader environmental plantings, carbon accounting, carbon credit and renewable energy certificate trading initiatives.

For instance, the Company recently launched Yonderr (www.yonderr.com.au), a website where individuals and businesses can purchase tailored carbon offset packages. Projects supported by Yonderr include planting native forests in Australia, supporting wind farms in India and providing funding for landfill gas plants in the USA. All Yonderr projects are fully accredited under the Verified Carbon Standard or NSW Greenhouse Gas Reduction Scheme.

The Company is also expanding into a new market overseas in New Zealand. New Zealand is an attractive investment destination for the Company not only because New Zealand has its own Emissions Trading Scheme that favours the organic development of carbon forest sink projects but also because the proposed Carbon Farming Initiative will enable projects to be developed in Australia with carbon offsets exported to customers in New Zealand.

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Federal Government's climate change policy and pending legislation

"Securing A Clean Energy Future" policy

On 10 July 2011, the Australian Government announced its plan for tackling climate change – “Securing a clean energy future”.

The plan includes:

putting a price on carbon pollution;
promoting innovation and investment in renewable energy;
improving energy efficiency; and
creating opportunities in the land sector to cut pollution.

Under the plan:

Australia aims to cut 159 million tonnes a year of carbon pollution from the atmosphere by 2020.
From 1 July 2012, around 500 of the biggest polluters in Australia will need to buy and surrender to the Government a permit for every tonne of carbon pollution they produce. For the first three years, the carbon price will be fixed like a tax, before moving to an emissions trading scheme in 2015.
In the fixed price stage, starting on 1 July 2012, the carbon price will start at $23 a tonne, rising at 2.5 per cent a year in real terms. From 1 July 2015, the carbon price will be set by the market with a floor price of $15 a tonne.
There are significant opportunities to benefit from reductions of carbon pollution from the land and from increasing the amount of carbon on the land under the Carbon Farming Initiative.
The Carbon Farming Initiative is fully linked to the carbon price, so that credits created by projects registered under the Initiative can be used by companies liable to pay the carbon price, to offset up to 5% of their liability during the fixed price period and up to 50% of their liability to 2020.

Full details of the plan are available at www.cleanenergyfuture.gov.au.

Carbon Farming Initiative

Legislation to introduce a Carbon Farming Initiative (CFI) was passed by the House of Representatives in June 2011 and is now progressing through the approval processes in the Senate. It is expected to be enacted when parliament next meets in August.

The CFI seeks to establish a carbon crediting mechanism which allows for the creation of credits for carbon storage and pollution reduction activities from Australian land-based actions which meet approved methodologies. It is anticipated that the CFI will provide government backing for tradeable ‘credits’ which are Kyoto compliant credits and may be sold to liable parties under the carbon pricing mechanism or sold on domestic voluntary markets and international markets.

Significant opportunity for the Company

With over 8 years of experience in the carbon offset industry in Australia, and accreditations under the NSW Greenhouse Gas Abatement Scheme and the past Greenhouse Friendly Scheme, CO2 Group is well positioned to take advantage of the opportunities which are expected to become available under the new Federal Government policy and the CFI and provide services and offsets to customers.

In particular it is expected that:

there will be increased interest in the creation and export of carbon credits from Australian forest carbon sink projects; and
opportunities to provide assistance to participants to comply with the rules for implementing and monitoring abatement activities and generating carbon credits under the scheme.

Importantly, once there is certainty in relation to the CFI, it should provide CO2 Group with access to international markets and enable forest sink projects to be recognised as voluntary abatement as well as offsets for businesses wishing to take action prior to the introduction of the proposed carbon tax in 2012.

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Financial Position

CO2 Group is in a sound financial position with cash reserves of over $13 million as at 30 June 2011.

The exercise of the Company's 155,316,283 Options currently on issue by mid November 2011 would provide an immediate capital injection of around $18.6 million, which will provide funding to maximise the Company's capacity to take advantage of opportunities arising from the recent policy and legislative developments in the carbon sector and expand operations into New Zealand.

To this end the Board is keen to see the maximum number of Options exercised.

Capital Structure

The capital structure of the Company as at the date of this Notice of Meeting is set out below:

	Shares	Options¹	Unlisted Options	Preference Shares²
No.	279,557,526	155,316,283	6,080,000	30,150,189

Notes:
¹ The Options expire on 12 November 2011. The exercise price is $0.12. The full terms and conditions of the Options are set out in Annexure A.
² The full terms and conditions of the Convertible Preference Shares are set out in Annexure B.

Recent Share Trading Prices of CO2 Group Shares on ASX

Closing price on 22 July 2011	5 day VWAP*	20 day VWAP*	60 day VWAP*
$0.195	$0.200	$0.210	$0.167

Notes:
* Prior to 22 July 2011.

RESOLUTION 1 - APPROVAL OF THE PROPOSED AMENDMENTS TO THE CO2 GROUP LIMITED EMPLOYEE INCENTIVE PLAN

Background

The Company received Shareholder approval of its Incentive Plan at the 2010 AGM.

Following advice, some refinements have been made to the Incentive Plan and as a result, the Company now seeks a further approval of the Incentive Plan as amended. Approval of the Incentive Plan as amended is being sought in accordance with the ASX Corporate Governance Council's Best Practice Recommendations, and in particular, for the purposes of ASX Listing Rules 7.2, Exception 9(b) and section 260C(4) of the Corporations Act.

As at the date of the Meeting, no securities have been issued under the existing Incentive Plan, but Resolutions 2 and 3 involve proposed issues under the Incentive Plan as amended.

As explained previously, the primary purpose of the Incentive Plan is to retain, attract and motivate key personnel. The Board believes that the success of the Company depends in a large measure on the skills and motivation of the people engaged in the management of the Company's business. The Incentive Plan will continue to be an important part of a comprehensive remuneration strategy for the Company's employees, aligning their interests with those of Shareholders by linking their rewards to the long term success of the Company and its financial performance.

Non-executive Directors, contractors and casual employees are not eligible to participate in the Incentive Plan. In addition, Ian Norman Trahar, the Company's Chairman and Harley Ronald Whitcombe, the Company's Company Secretary and an Executive Director, will not participate in the Incentive Plan.

Amendments to the Incentive Plan

The key amendments to the Incentive Plan previously approved at the 2010 AGM include:

The Incentive Plan now allows for the Shares to be provided on vesting of Performance Rights and/or exercise of Incentive Options (together Incentives) to be issued or transferred to, and held by, the Trustee of the Trust on behalf of an employee. The Trustee will act on the direction of the relevant employee entitled to the Shares subject to the terms of the Trust Deed. For example, the employee may direct the Trustee how to exercise the voting rights attaching to those Shares;
The Company may provide funds to the Trustee in order for the Trustee to subscribe for new Shares or to acquire Shares on-market and hold those Shares pending satisfaction of any applicable requirements.
The Board may also impose a restriction period up to a maximum of 7 years from the date of the grant of the Incentive on some or all of the Shares provided upon vesting/exercise of the Incentives. Unless the Board waives any applicable restriction period, the relevant employee is not entitled to dispose of or deal with any Shares granted to the employee under the Incentive Plan.
Provisions allowing for early vesting of performance conditions in the event of a change of control other than by takeover scheme of arrangement or capital reduction have been clarified to ensure that the potential increase in voting power by Gabor Holdings and its associates upon the exercise of Options (the subject of Resolution 4) will not trigger accelerated vesting.

Directors' Recommendation

The Board (other than Mr Andrew Grant and Dr Christopher Mitchell who do not make a recommendation because they are each eligible to participate in the Incentive Plan) recommends that Shareholders vote in favour of Resolution 1. They consider that the amended Incentive Plan remains an appropriate mechanism to assist in the recruitment, reward, retention and motivation of senior executives and employees of the CO2 Group. The amendments will now provide capital management flexibility by allowing the Company to be able to direct the Trustee to either buy Shares on-market (non-dilutive but with a real cash cost) or to subscribe for the issue of new Shares (dilutive but retaining cash) each time Performance Rights vest and/or Incentive Options are exercised, and Shares are to be allocated to the Trustee.

The Chairman intends to vote open proxies in favour of Resolution 1.

Approvals sought

Shareholder approval is being sought under ASX Listing Rule 7.2, Exception 9(b) for the Incentive Plan (as amended). Listing Rule 7.1 requires Shareholder approval for an issue of securities if, over the 12 months period, the amount of securities issued is more than 15% of the number of ordinary securities on issue at the start of that 12 month period. In the absence of approval under ASX Listing Rule 7.2, Exception 9(b), grants under the Incentive Plan can still occur but will be counted as part of the 15% limit which would otherwise apply during a 12 month period.

In accordance with the Corporations Act, the Company may financially assist a person to acquire Shares in the Company under an employee share plan if that plan has been approved by a resolution passed at a general meeting of the Company¹.

¹ See Section 260C(4) of the Corporations Act.

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As the amendments to the Incentive Plan now allow the Company to provide financial assistance to the Trustee to allow it to acquire or subscribe for Shares (to satisfy the obligation to provide shares on vesting of the Performance Rights and/or exercise of Incentive Options), approval is also being sought for the Incentive Plan under section 260C(4) of the Corporations Act. That section allows the provision of financial assistance without shareholder approval where it is provided under an employee incentive scheme approved by shareholders.

If Shareholders do not approve the Incentive Plan (as amended), the Company will continue with the Incentive Plan as approved at the 2010 AGM.

Additional Information

In addition to the disclosures in this Explanatory Statement, and in accordance with ASX Listing Rule 7.2, Exception 9(b), the following information is provided to Shareholders:

a) as at the date of the Meeting, no grants will have yet been made under the Incentive Plan. The following grants of Performance Rights are proposed:

to Mr Grant – 5,589,150 Performance Rights, subject to approval under Resolution 2;
to Dr Mitchell – 2,794,575 Performance Rights, subject to approval under Resolution 3; and
to other senior employees – 4,191,862 Performance Rights on the same terms as those issued under Resolutions 2 and 3.

b) the Company ceased to grant options under the Existing ESOP following approval of the Incentive Plan at the 2010 AGM. The total number of unexpired options granted under the Existing ESOP since it was approved are:

Number	Exercise price	Grant date	Expiry date
1,580,000	$0.49	20 November 2008	30 November 2012

In addition, the Company has previously granted a number of options to employees and executives of the CO2 Group under contracts of employment or otherwise in relation to their employment as disclosed in the 2010 AGM meeting documents.

c) A summary of the terms of the Incentive Plan (as amended) is set out above and in Annexure C. A copy of the full terms of the Incentive Plan (as amended) are available for inspection at the Company's registered office during business hours, or may be obtained free of charge from the Company at Level 11, 225 St Georges Terrace, Perth, Western Australia prior to the date of the Meeting.

d) The primary purpose of the grant of Incentives under the Incentive Plan is not to raise capital, but to form part of the employee's remuneration package. No funds will be raised from the grant of the Incentives. If Performance Rights are granted and vest, then no funds will be raised upon the issue/transfer of the Shares. However, if Incentive Options are granted and are exercised, then the net exercise price paid upon the issue/transfer of the Shares will be used for general working capital purposes. An employee must contribute their own money to the Company to fund the exercise price of any Incentive Options.

e) The Board's current policy (which may change in the future) is to grant only Performance Rights under the Incentive Plan. A Performance Right does not have an exercise price and therefore allows an employee, subject to satisfaction of the relevant vesting conditions and performance hurdles (as applicable), to benefit by their Performance Rights vesting into Shares without the payment of any cash consideration.

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f) There are no significant opportunity costs to the Company or benefits foregone by the Company in granting the Incentives upon the terms of the Incentive Plan proposed.

g) The Directors are not aware of any information other than that set out in this Explanatory Memorandum that is reasonably required by Shareholders in order to decide whether or not it is in the Company's interests to pass the proposed Resolution 1.

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RESOLUTION 2 AND 3 – APPROVAL OF THE GRANT OF PERFORMANCE RIGHTS TO MR ANDREW GRANT AND DR CHRISTOPHER MITCHELL

Background

Under the terms of the Incentive Plan, which was approved by Shareholders at the Company's 2010 AGM and which (subject to shareholder approval) is to be amended in accordance with Resolution 1, the Board has the discretion to grant Performance Rights to any employee it declares to be an "eligible executive" upon the terms set out in the Incentive Plan and upon such terms and conditions as the Board determines.

It is proposed to issue Performance Rights to Mr Grant and Dr Mitchell. Mr Grant is the Chief Executive Officer and Managing Director of the Company. Dr Mitchell is Executive Director of Corporate Development and a Director of the Company.

Given that both Mr Grant and Dr Mitchell are Directors of the Company, the issue of Performance Rights to them requires prior Shareholder approval under ASX Listing Rule 10.14.

Reasons for the grant of the Performance Rights

The proposed grant of the Performance Rights to Mr Grant and Dr Mitchell is to further align their interests with those of Shareholders by linking Mr Grant's and Dr Mitchell's rewards to the long term success of the Company, specifically to the returns achieved by Shareholders.

The Board believes that the success of the Company depends on the skills and motivation of the people engaged in the management of the Company's business. It is therefore important that the Company is able to retain and attract people of the highest calibre with the tightly held specialist expertise required to operate in carbon market.

Number of Performance Rights

Subject to Shareholder approval being obtained, the Board has decided to invite:

Mr Grant to apply for 5,589,150 Performance Rights, which will convert to 5,589,150 Shares if the relevant vesting conditions are satisfied; and
Dr Mitchell to apply for 2,794,575 Performance Rights, which will convert to 2,794,575 Shares if the relevant vesting conditions are satisfied,

(Incentive Entitlement) under the Incentive Plan. The relevant vesting conditions, performance hurdles and other terms set out below.

Key terms of the Performance Rights

The Performance Rights are proposed to be 100% "at risk" and will be subject to the following vesting conditions:

a) Mr Grant and Dr Mitchell (as applicable) being continuously employed by a member of CO2 Group from the grant of the Performance Rights until the dates described below (Continuous Employment Condition); and
b) CO2 Group achieving the Return on Capital targets for the relevant period as described below (ROC Condition).

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Conditions for Mr Grant and Dr Mitchell with respect to the Performance Rights

Tranche	No. of Performance Rights that may vest	Test Date
1	• 1,863,050 to Mr Grant
• 931,525 to Dr Mitchell	30 September 2012	• Continuous Employment Condition as at 30 September 2012
2	• 1,863,050 to Mr Grant
• 931,525 to Dr Mitchell	1 February 2013 (with retest* on 1 February 2014)	• Continuous Employment Condition as at 30 September 2012
• Return On Capital of 25% p.a. or more for the 12 month period ending 30 September 2012 (Tranche 2 ROC Condition)
3	• 1,863,050 to Mr Grant
• 931,525 to Dr Mitchell	1 February 2014	• Continuous Employment Condition as at 30 September 2013
• Return On Capital of 25% p.a. or more for the 2 year period ending 30 September 2013 (Tranche 3 ROC Condition)

if the Tranche 2 ROC Condition is not satisfied on the 1 February 2013 test date, it will be retested on the 1 February 2014 test date and will be satisfied if the Tranche 3 ROC Condition is satisfied as at that date.

The ROC Condition will be calculated using the following formula:

$$
\text{Return On Capital} = \text{EBIT} / \text{Average Capital Employed}
$$

where:

EBIT = earnings before interest and tax (as stated in the Company's audited financial statements) but excluding any earnings arising from a sale of assets, profits arising from an internal restructure and non-cash profits.

Average Capital Employed =

a) in the case of the Tranche 2 ROC Condition: the Company's average monthly consolidated net assets (excluding Free cash) for the 12 month period October 2011 to September 2012; and
b) in the case of the Tranche 3 ROC Condition: the Company's average monthly consolidated net assets (excluding Free cash) for the 2 year period October 2011 to September 2013.

Free Cash = cash and cash equivalents less deferred income

Other than as set out above, the key terms of the Performance Rights will be consistent with the terms of the Incentive Plan. For a summary of the Incentive Plan, refer to Annexure C of this Explanatory Memorandum.

ASX Listing Rule Disclosures

For the purposes of the approval sought under ASX Listing Rules 10.14 and for all other purposes, the following information is provided to Shareholders in respect of the Performance Rights:

(a) The Performance Rights will be granted to Mr Grant (the Chief Executive Officer of the Company) and Dr Mitchell (the Executive Director of Corporate Development of the Company) or their respective nominees.

(b) Subject to Shareholder approval being obtained, the maximum number of Performance Rights granted to Mr Grant and Dr Mitchell will be as follows:

Mr Grant - 5,589,150 Performance Rights; and
Dr Mitchell - 2,794,575 Performance Rights.

(c) No consideration is payable by Mr Grant and Dr Mitchell at the time of grant of the Performance Rights or upon the allocation of Shares to which they may become entitled on the vesting of some or all of the Performance Rights.

(d) No grants have been made under the Incentive Plan as at the date of this Explanatory Memorandum and it is expected that none will be made until after the date of the General Meeting. Full details of Mr Grant's and Dr Mitchell's holdings of Shares and Options are set out Table 3 on page 16. It is intended that a further 4,191,862 Performance Rights will be granted to other senior employees of the Company on the same terms as those outlined above.

(e) No loans will be made by the Company in connection with the acquisition of the Performance Rights.

(f) It is expected that the Performance Rights will be granted to Mr Grant and Dr Mitchell as soon as practicable after Shareholder approval is received and in any event no later than 12 months from the date of the General Meeting without obtaining further Shareholder approval.

A voting exclusion statement for Resolution 2 and 3 is included in the Notice of Meeting.

Corporations Act requirements

Chapter 2E of the Corporations Act also requires shareholder approval where a public company seeks to give a "financial benefit" to a "related party" (unless an exception applies). Directors such as Mr Grant and Dr Mitchell are considered to be related parties within the meaning of the Corporations Act. The Performance Rights to be granted to Mr Grant and Dr Mitchell will constitute a financial benefit for the purposes of Chapter 2E of the Corporations Act.

One of the exceptions to the requirement to obtain shareholder approval in accordance with Chapter 2E applies where the financial benefit constitutes part of the related party's "reasonable remuneration". The Board (other than Mr Grant and Dr Mitchell who are not able to make a recommendation due to their interest in the Resolution), considers that the grant of the Performance Rights to Mr Grant and Dr Mitchell and any issue of Shares upon the satisfaction of the vesting conditions of those Performance Rights to them constitutes part of Mr Grant's and Dr Mitchell's reasonable remuneration. In reaching this conclusion, the Board has had regard to a variety of factors including market practice and the remuneration offered to persons in comparable positions at comparable companies. In particular, the Board has had regard to the global and competitive nature of the business and Mr Grant's role as Chief Executive Officer and Dr Mitchell's role as Executive Director of Corporate Development.

The Chairman intends to vote open proxies in favour of the Resolutions 2 and 3.

The grant of the Performance Rights to Mr Grant and Dr Mitchell will have a diluting effect on the percentage interest of existing Shareholders' holdings if all of the Performance Rights vest and Shares are allocated accordingly. If Mr Grant and Dr Mitchell are granted the maximum number of Performance Rights they are entitled to in accordance with their Incentive Entitlement, all of them vest and Shares are issued to satisfy the requirement to provide to provide Shares on vesting, the dilutionary effect would amount to approximately 3.00% of the Company's current issued Shares.

Termination Benefits

The Corporations Act restricts the benefits which can be given to certain persons (those who hold a managerial or executive office, as defined in the Corporations Act) on leaving their employment with the Company or a related body corporate (the Group). Under section 200B of the Corporations Act, a company may only give a person a benefit in connection with their ceasing to hold a managerial or executive office in the Group if it is approved by Shareholders or an exemption applies. The Company obtained this approval in respect of the Performance Rights granted under the Incentive Plan at the 2010 AGM. This approval will continue to apply to the Incentive Plan (as amended).

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RESOLUTION 4 – APPROVAL OF ISSUE OF SHARES TO GABOR HOLDINGS AND ITS ASSOCIATES UPON EXERCISE OF OPTIONS

Overview

The Company is seeking Shareholder approval to authorise the exercise of Options held, or to be held, by Avatar Industries, an associate of Gabor Holdings. The Options are exercisable at 12 cents each and expire on 12 November 2011.

Gabor Holdings is controlled by Mr Ian Trahar, the Chairman of CO2 Group.

Avatar Industries currently holds, or has an interest in, a total of 89,960,018 Options (Gabor Options) of the 155,316,283 Options on issue. The Option holding of Avatar Industries comprises:

67,737,796 Options currently held (Existing Options) comprising:
50,000,000 Options granted to Gabor Holdings on 12 November 2001. Shareholder approval for the issue of these Options and Shares upon exercise of the Options was obtained on 26 October 2001; and
17,737,796 Options issued to Gabor Holdings and its associates on 15 July 2002 as consideration under a takeover bid made by CO2 Group Limited (then called Revesco Group Limited) for Ranger Minerals Limited,
22,222,222 Options which Avatar Industries is entitled to acquire pursuant to an Agreement with Crestpark dated 20 July 2011 (Crestpark Options).

The exercise of all of the Gabor Options will increase Gabor Holdings' voting power in the Company. As the Options are well "in the money" the Company expects that most optionholders will exercise their Options.

Assuming all of the Options are exercised, which is expected, the voting power of Gabor Holdings will increase from 41.79% currently to:

47.55% if it is entitled to exercise all Gabor Options, being an increase of 5.76%; and
44.73% if it exercises the Existing Options it currently holds (but does not acquire or exercise the Crestpark Options), being an increase of 2.94%.

To the extent that Gabor Holdings' voting power increases by more than 3% from its voting power 6 months² before the exercise of the Options (and resultant issue of Shares), Gabor requires Shareholder approval to exercise the Options.

Approval is required to enable Gabor Holdings to exercise all of the Crestpark Options. In addition, in the unlikely event that a large number of optionholders did not exercise their Options for any reason, there is a prospect that Gabor Holdings may be prevented by the Corporations Act from exercising the some of its Existing Options (see Table 2 below).

The maximum voting power that Gabor Holdings may obtain following exercise of all of the Gabor Options (assuming no other Options are exercised) is 55.96%. This is an increase of 14.17%. The Company considers that this outcome is unlikely given that the Options are deeply "in the money" and so are expected to be exercised.

To maximise the potential for funds to be raised by exercise of Options in all circumstances, the Board (other than Mr Trahar) has resolved to seek Shareholder approval to remove any doubt regarding the capacity of Gabor Holdings to exercise its Existing Options and to authorise the exercise of the Crestpark Options.

Accordingly, the Company is seeking Shareholder approval under Section 611 Item 7 of the Corporations Act so that Gabor Holdings' voting power may increase to up to a maximum of 55.96% of the voting

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shares of CO2 Group, upon the issue of up to 89,960,018 Shares, from exercise of Gabor Options held or to be held by Avatar Industries.

Upon exercise of all of the Gabor Options:

the Company will receive cash of $10,795,202 (being the exercise price for the 89,960,018 Options);
the percentage ownership of existing Shareholder's will be diluted (with much of the potential dilution being offset if the relevant Shareholder also exercises any Options it holds); and
the voting power of Gabor Holdings will increase. The extent of the increase will depend on the extent to which other holders of Options also exercise their Options. Given Gabor Holdings' current voting power, it is not expected that the extent of effective control over the Company will materially change as a result of the exercise of Options. It should be noted that it is theoretically possible that the voting power of Gabor Holdings may exceed 50% following exercise of its Options. In these circumstances Gabor Holdings and its associates may pass an ordinary resolution on their own.

Gabor Holdings has been the largest shareholder in CO2 Group since November 2001. Gabor Holdings has advised that it intends to continue to be supportive of the development of the Company's current business and it is Gabor Holdings' intent to exercise the Gabor Options.

Independent Expert Report

The Directors have appointed BDO to prepare the Independent's Expert Report to provide an opinion on whether or not the proposal in Resolution 4 is fair and reasonable to the Shareholders who are not associated with Gabor Holdings and Mr Trahar.

BDO has concluded that the proposed transaction is fair and reasonable to the non-associated Shareholders of the Company.

The Company strongly recommends that you read the Independent's Expert Report in full, a copy of which is accompanying this Notice of General Meeting.

Board recommendations

The Directors' of the Company (other than Mr Trahar who refrained from voting given his interest) voted in favour of the relevant Board resolution to put Resolution 4 and the Explanatory Memorandum to Shareholders.

Based on the information available, the Directors' of the Company (other than Mr Trahar who makes no recommendation given his interest) recommend that Shareholders vote in favour of Resolution 4 because they are of the view that the proposed allotment is beneficial for the Company.

The Board considers that Resolution 4 provides additional certainty that there will be an injection of capital into the Company as a result of the exercise of the Options held or to be held by Avatar Industries. All Directors (other than Mr Trahar who is precluded from voting) with shareholdings in the Company intend to vote for Resolution 4.

Given Mr Trahar's interest in Resolution 4, Dr Mal Hemmerling will act as Chairman of the Meeting in relation to this Resolution 4. The Chairman intends to vote all undirected proxies in favour of Resolution 4.

Details of Gabor Holdings' interest in the Company

Gabor Holdings is the Company's largest shareholder, currently holding 116,831,546 Shares, amounting to 41.79% of Shares currently on issue.

A summary of Gabor Holdings' shareholdings in the Company are summarised in Table 1 below. The entities listed below are associates of Gabor Holdings and Mr Trahar.

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Table 1 – Interests of Gabor Holdings and its associates

Name	Shares held	Current % (undiluted)^{1}	Options held	Shares held if Options exercised	Estimated % (fully diluted)^{4}	Estimated % (Options only)^{5}	Maximum % (undiluted)^{6}
Gabor Holdings as trustee for the Tricorp Trust	104,575,625	37.41%	-	104,575,625	22.49%	24.05%	28.30%
Gabor Holdings	10,904,046	3.90%	-	10,904,046	2.35%	2.51%	2.95%
Gabor Investments	233,125	0.08%	-	233,125	0.05%	0.05%	0.06%
Arlec Australia	15,625	0.001%	-	15,625	0.003%	0.004%	0.004%
Zeppelin Holdings	435,000	0.16%	-	435,000	0.09%	0.10%	0.12%
Avatar Industries^{5}	-	-	89,960,018	89,960,018	19.35%	20.69%	24.35%
Ian Norman Trahar	668,125	0.24%	-	668,125	0.14%	0.15%	0.18%
Total Voting Power	116,831,546	41.79%	89,960,018	206,791,564	44.47%	47.55%	55.96%
Increase in Voting Power					2.68%	5.76%	14.17%

Notes
1. Current % interest held based on total issued capital of 279,557,526 voting shares on issue. There are 30,150,189 Convertible Preference Shares on issue and a total of 155,316,283 Options (excluding unlisted options) on issue.
2. % assumes that all Options are exercised (other than 6,080,000 unlisted options which are currently all "out of the money") and all of the 30,150,189 Convertible Preference Shares are converted.
3. % assumes that all Options are exercised (other than 6,080,000 unlisted options which are currently all "out of the money") but none of the 30,150,189 Convertible Preference Shares are converted.
4. % interest assuming that all Gabor Options on issue are exercised and no other Options or unlisted options are exercised and none of the 30,150,189 voting Convertible Preference Shares are converted.
5. Gabor Holdings and associates transferred 67,737,796 Existing Options to Avatar Industries on 20 July 201. Avatar Industries has agreed to acquire 22,222,222 Crestpark Options held by Crestpark subject only to Shareholder approval under Resolution 4.
6. The entities listed above are associates. Accordingly each entity has the same voting power in CO2 Group.

Requirement for shareholder approval

The Corporations Act contains takeover provisions which, in essence, limit the ways in which a person can acquire voting power over 20% in a company or, if it holds more than 20%, the way in which that interest may be increased³.

One of the permitted methods for increasing an interest above 20% is known as the 3% creep exemption. Under this exemption, an acquisition is permitted where throughout the 6 months before the acquisition, the acquirer, or an associate, has had voting power in the company of at least 19% and as a result of the acquisition, none of those persons would have voting power in the company more than 3% higher than they had 6 months before the acquisition⁴. Gabor Holdings and its associates will be entitled to rely on the 3% creep exemption to exercise its Existing Options if most of the other optionholders also exercise their Options.

The Company wishes to ensure that Gabor Holdings may exercise its Existing Options irrespective of whether other optionholders also exercise their Options and to authorise the exercise of the Crestpark Options which are to be acquired by an associate of Gabor Holdings. To permit this, it is proposed to seek shareholder approval for the theoretical increase in voting power which can arise upon exercise of the Gabor Options by Gabor Holdings and its associates. Obtaining prior shareholder approval for an acquisition in a way which complies with the requirements of the Corporations Act is also a permitted method for increasing an interest above 20%⁵.

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Additional Information required by the Corporations Act and ASIC Regulatory Guide

For the purposes of the Corporations Act and ASIC Regulatory Guide 74, in addition to the information already outlined above and the Independent Expert's Report, the following information is provided to Shareholders in relation to Resolution 4.

The identity of the acquirer

Gabor Holdings is a company controlled by Mr Trahar. Gabor Holdings holds Shares in its own right and as trustee of the Tricorp Trust, a discretionary trust, the beneficiaries of which are individuals and companies associated with the Company's current Chairman, Mr Trahar. Gabor Holdings' other associates who will obtain a relevant interest in the Shares to be acquired on exercise of the Options are outlined in Table 1 above. They are all entities controlled by Mr Trahar. Accordingly, Mr Trahar has a relevant interest and voting power over all of the Shares held or acquired by Gabor Holdings and its associates.

Mr Trahar is a Director of CO2 Group and an investor in a number of publicly listed and unlisted companies involved in a diversified range of activities covering various business sectors. Mr Trahar holds a Bachelor of Economics and MBA degrees and is a member of the Australian Institute of Company Directors.

Particulars of the interest of Gabor Holdings and its associates in certain scenarios

Table 1 above summarises Gabor Holdings' voting power prior to and after the exercise of the Options and estimates its expected voting power and the maximum voting power it may acquire.

The exact extent of Gabor Holdings' voting power after exercise of the Options held or to be held by Avatar Industries is dependent on the actions of other optionholders and so cannot be determined precisely at this time. In addition, Gabor Holdings' voting power may be affected by changes to the number of Shares on issue in CO2 Group, which can be effected by a range of actions by the Company and other third parties. For instance, the Company's issued Shares may be affected by any cancellation of Shares, issue of Shares (whether upon the exercise of options (including unlisted employee options) or Performance Rights to be issued or as a result of a placement). Gabor Holdings may dispose of or acquire shares, which will affect its voting power following the exercise of Options.

The calculations in this Explanatory Memorandum are current to 25 July 2011. The Company expects Gabor Holdings voting power to be further diluted by the date of Meeting as optionholders exercise their Options. Any Options exercised prior to the Meeting will be reflected in an Appendix 3B which will be released to the ASX.

The table below provides an indication of the percentage voting power of Gabor Holdings depending on the percentage of other Options which are exercised. Given that the Options are "in the money", the Board believes that there is a high probability that most of the Options will be exercised.

	Options exercised by optionholders other than Gabor Holdings and its associates
	100%	90%	75%	50%	25%	0%
Gabor Holdings Voting Power (Options only)^{1}	47.55%	48.28%	49.41%	51.42%	53.59%	55.96%
Gabor Holdings Voting Power (Fully Diluted)^{2}	44.47%	45.10%	46.09%	47.83%	49.71%	51.74%

Notes
1. the percentage shown assumes that all Gabor Options are exercised and that the percentage shown of the other Options are exercised. Also assumes that the 6,080,000 unlisted options which are currently all "out of the money" are not exercised and none of the 30,150,189 Convertible Preference Shares are converted.
2. the percentage shown assumes that all Gabor Options are exercised and that the percentage shown of the other Options are exercised and all of the 30,150,189 Convertible Preference Shares are converted. Also assumes that the 6,080,000 unlisted options which are currently all "out of the money" are not exercised.

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Gabor Holdings' intentions regarding the Company

Gabor Holdings and Mr Trahar have advised that if the acquisition of Shares for which the approval is sought proceeds:

there is no intention to change the Board of the Company;
there is no intention to change the business of the Company;
there is no intention to inject further capital into the Company (other than upon the exercise of Options);
there is no intention to make any material change the future employment of the present employees of the Company;
there is no proposal whereby any property will be transferred between the Company on the one hand and Gabor Holdings, Mr Trahar or any person associated with Gabor Holdings or Mr Trahar on the other;
there is no intention to otherwise redeploy the fixed assets of the Company; and
there is no intention to change the Company's current financial or dividend policies.

The intentions of the Company and Mr Trahar set out above are based on facts and information concerning the Company which are known to the Company and Mr Trahar as at the date of this Explanatory Memorandum. Accordingly, the intentions may vary as other information becomes available or circumstances change.

Particulars of related contracts

There are no contracts or proposed contracts between Gabor Holdings and the Company or any of its associates which are conditional on, or directly dependent on, Shareholders' approving the exercise of Options held or to be held by Avatar Industries other than the Agreement between Crestpark and Avatar Industries for the acquisition of 22,222,222 Options at $0.06 per Option.

When the allotment is to be completed

The Shares will be issued not more than 10 business days after receipt of a properly executed notice of exercise of the Options and payment of the exercise price. The last date for exercise of the Options is 12 November 2011.

Interest of Directors

Mr Trahar controls Gabor Holdings and its associates.

Other than interests as Shareholders and optionholders, the current Directors' of the Company (other than Mr Trahar have no interest in Resolution 4. A summary of the Shares and Options in which each Director has an interest is as follows:

Table 3

Name of Director	Shares held by the Director or his associates	Options held by the Director or his associates	Unlisted Options held by the Director or his associates
H R Whitcombe	7,742,000	4,145,157	-
A W T Grant	-	3,968,654	-
Dr M B Hemmerling	825,000	-	1,500,000
Dr C D Mitchell	40,000	-	3,000,000
P J Favretto	12,500,522	7,624,478	-

ASIC and ASX's role

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In accordance with ASIC Regulatory Guide 74, the Company has lodged the Notice of Meeting and the Explanatory Memorandum with ASIC before the notice convening a general meeting is given.

The fact that the accompanying Notice of Meeting, the Explanatory Memorandum and other relevant documentation has been received by ASX and ASIC is not to be taken as an indication of the merits of the Resolutions or the Company. ASIC, ASX and its respective officers take no responsibility for any decision a Shareholder may make in reliance on any of that documentation.

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18

GLOSSARY

2010 AGM means the annual general meeting of CO2 Group held on 24 February 2011.

Agreement means the agreement dated 20 July 2011 between Avatar Industries and Crestpark to acquire 22,222,222 Options from Crestpark.

Arlec Australia means Arlec Australia Pty Ltd (ABN 29 009 322 105) of Level 11, 225 St Georges Terrace, Perth WA 6000.

ASIC means the Australian Securities and Investments Commission.

ASX means ASX Limited (ABN 98 008 624 691), or as the context requires, the financial market operated by it.

ASX Listing Rules means the Listing Rules of the ASX.

Avatar Industries means Avatar Industries Pty Ltd (ABN 68 008 742 390) of 'Tower A Zenith Centre' Level 20, 821 Pacific Highway, Chatswood NSW 2067.

BDO means BDO Corporate Finance (WA) Pty Ltd (ABN 27 124 031 045).

Board means the board of Directors of the Company.

Company or CO2 Group means CO2 Group Limited (ABN 50 009 317 846) of Level 11, 225 St Georges Terrace, Perth WA 6000.

CO2 Australia means CO2 Australia Limited (ABN 81 102 990 803) of 349 Moray Street, South Melbourne Victoria 3205.

Constitution means the Company's constitution.

Convertible Preference Shares means convertible preference shares issued by the Company on the terms and conditions set out in Annexure B to this Explanatory Memorandum.

Corporations Act means the Corporations Act 2001 (Cth).

Crestpark means Crestpark Investments Pty Ltd (ABN 85 097 637 628) of Level 1, 10 Kings Park Road, West Perth WA 6005.

Director means a director of the Company.

Existing ESOP means the CO2 Group Limited Employee Option Share Plan approved by Shareholders at the annual general meeting of CO2 Group held on 8 November 2007.

Gabor Holdings means Gabor Holdings Pty Ltd (ABN 77 009 143 364) of Level 11, 225 St Georges Terrace, Perth WA 6000.

Gabor Investments means Gabor Investments Pty Ltd (ABN 18 060 676 520) of Level 1, 10 Kings Park Road, West Perth WA 6005.

General Meeting or Meeting means the General Meeting of Shareholders of the Company to be held at the Theatrette, Level 2, QV1 Building, 250 St Georges Terrace, Perth Western Australia 6000, on Wednesday, 31 August 2011 at 10.30am (WST), or any adjournment thereof.

Incentive Option means an option to acquire a Share, subject to vesting and satisfaction of any performance conditions, granted in accordance with the Incentive Plan.

Incentive Plan means the Company's Employee Incentive Plan as amended from time to time a summary of which is set out in Annexure C to this Explanatory Memorandum.

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20

Incentives
means Performance Rights and Incentive Options issued under the Incentive Plan.

Independent Expert's Report
means the report prepared by BDO which is set out in Annexure D to this Explanatory Memorandum.

Notice of Meeting or Notice
means the notice of Meeting and the Explanatory Memorandum.

Option
means an option to acquire a Share, subject to vesting and satisfaction of any terms and conditions set out in Annexure A to this Explanatory Memorandum.

Performance Right
means an entitlement to a Share, subject to vesting and satisfaction of any performance conditions, granted in accordance with the Incentive Plan.

Share
means a fully paid ordinary share in the capital of the Company.

Shareholder
means a person, corporation or body holding a Share on the CO2 Group share register.

Tricorp Trust
means a discretionary trust, the beneficiaries of which are individuals and companies associated with the Company's current Chairman, Ian Norman Trahar.

Trust
means the "CO2 Employee Share Trust", being an employee share trust established by the Company for the purpose of administering Shares for the benefit of the participants in the Incentive Plan and any other employee incentive plan operated by the Company from time to time.

Trust Deed
means the Trust Deed to be entered into by the Company and the trustee following completion of the Meeting.

Trustee
means the trustee who will be appointed by the Company following completion of the Meeting to be the initial trustee of the Trust.

Zeppelin Holdings
means Zeppelin Holdings Pty Ltd (ABN 88 009 287 610) of Level 11, 225 St Georges Terrace, Perth WA 6000.

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ANNEXURE A

OPTION TERMS & CONDITIONS EXPIRING 12 NOVEMBER 2011

The Options will be issued on the terms and conditions set out below:

Each Option entitles the holder to subscribe for and be allotted one Share at an exercise price of $0.12 per share.
The Options are exercisable at any time prior to 5.00pm WST 10 calendar years after their date of issue (“the Expiry Date”) by notice in writing to the Directors accompanied by payment of the exercise price.
The Options are transferable.
Shares allotted and issued pursuant to the exercise of an Option will be allotted and issued not more than 10 business days after receipt of a properly executed notice of exercise of the Option and payment of the requisite application moneys.
All shares issued upon exercise of the Options will rank pari passu in all respects with Shares then on issue. The Company will apply for official quotation by ASX of all shares issued upon exercise of the Options within three business days after the date of allotment of those shares except if escrow conditions of ASX apply to such shares.
The Options will not entitle the holder to any dividends (or shares or rights in lieu of dividends) declared or used by the Company.
In the event of a pro rate issue by the Company, the Company shall offer the holder of Options the opportunity to participate at the same time and price as the holders of Ordinary Shares without being required to exercise his Options in accordance with ASX Listing Rule 6.20.
If, before the expiry of any Options, the Company makes an issue of shares to the holders of shares by way of capitalisation of profits or reserves (a “bonus issue”) other than in lieu of a dividend payment, then upon exercise of an option, the holder will be entitled to have issued to him (in addition to the shares which he is otherwise entitled to have issued to him upon such exercise) additional shares in the Company. The number of additional shares is the number of shares which would have been issued to him under that bonus issue (“bonus shares”) if on the date on which entitlements were calculated he had been registered as the holder of the number of shares which he would have been registered as holder if immediately before that date he had exercised his Options. The bonus shares will be paid up by the Company out of profits or reserves (as the case may be) in the same manner as was pari passu in all respects with the other shares allotted upon exercise of an Option.
In the event of any reorganisation of the issued capital of the Company on or prior to the Expiry Date, the rights of a holder of Options will be changed to the extent necessary to comply with the applicable ASX Listing Rules at the time of the reorganisation.
The Company will, at least 20 business days before the Expiry Date, send notices to the holders stating the name of the holder, the number of Options held and the number of securities to be issued on exercise of the Options, the exercise price, the due date for payment and the consequences on non-payment.
In the event a proposal is announced for the reorganisation, amalgamation or merger of the Company or its main undertaking or an offer made pursuant to an on-market or off-market takeover bid for Shares, then the Options may be exercised immediately.

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ANNEXURE B

CONVERTIBLE PREFERENCE SHARES

1. Issue price

Each Convertible Preference Share shall be issued at an issue price of $0.00001.

2. Voting rights

At any meeting of the members of the Company a Convertible Preference Shareholder in respect of each Convertible Preference Share held has the same voting rights as an ordinary fully paid share of the Company in the circumstances set out in ASX Listing Rule 6.3 and in no others.

3. Rights issues

A Convertible Preference Shareholder shall be entitled to participate in all rights issues of Shares (except bonus issues by way of a return of capital or issues in payment of dividends) in the same manner and on the same basis as the holders of ordinary shares as if the Convertible Preference Shares held by it were ordinary shares.

4. Conversion of Shares

i. At any time a Convertible Preference Share may, at the election of the Convertible Preference Shareholder, be converted into one ordinary fully paid share in the capital of the Company by the payment of $0.06499 to the Company.

ii. The conversion of a Convertible Preference Share will take place immediately upon written notice of the conversion together with a cheque for the requisite payment being given to the Company by the holder at its registered or principal office.

iii. Conversion of Convertible Preference Shares may only be made in multiples of 1000 Convertible Preference Shares.

iv. A conversion of a Convertible Preference Share will not constitute a cancellation, redemption or termination of a Convertible Preference Share but will be by way of variation to the status of, and rights attaching to, the Convertible Preference Share so that it becomes an ordinary share.

5. Reconstruction of capital

If the Company's ordinary share capital is reconstructed, consolidated or divided into a greater or lesser number of securities, the Convertible Preference Shares will automatically be reconstructed, consolidated or divided (as the case may be) on the same basis.

6. Repayment of capital

A Convertible Preference Share, on a winding up, entitles the holder to payment of the issue price paid in respect of the share in priority to any payment or other distribution on any Share. Thereafter, Shareholders and Convertible Preference Shareholders will participate equally in any surplus, pro-rata according to their shareholding.

7. Dividends

Convertible Preference Shareholders shall be entitled to the payment of a dividend equal to one hundred thousandth of the dividend declared and payable in respect of a Share and such dividend shall rank in priority over Shares for payment. Dividends on Convertible Preference Shares will not be cumulative.

8. No Transfer

A Convertible Preference Share is not transferable.

9. General

Subject to section 254(B) of the Corporations Act, in all other respects a Convertible Preference Shareholder shall have the same rights as an Share.

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ANNEXURE C

SUMMARY OF EMPLOYEE INCENTIVE PLAN

Eligible employees:
Under the terms of the Incentive Plan, the Board may determine which full and part time employees of the CO2 Group and its associated bodies corporate may participate in the Incentive Plan.

The Incentive Plan is targeted at CO2 Group's senior management and employees, including executive Directors (as determined by the Board from time to time). There are currently approximately 10 employees who will be eligible to participate in the Incentive Plan. Ian Trahar and Harley Whitcombe will not participate in the Incentive Plan.

Non-executive Directors, contractors and casual employees are not eligible to be granted Incentives.

Incentives:
The Incentive Plan allows the Board to grant Performance Rights and Incentive Options to eligible participants.

Exercise Price:
The Board's current policy is to grant only Performance Rights under the Incentive Plan, which will not require the employee to pay any amount to the Company upon vesting.

However the Board may choose to grant Incentive Options under the Incentive Plan at any time, without further shareholder approval. If it chooses to do so, the exercise price of any Incentive Options granted under the Incentive Plan is set at the absolute discretion of the Board and the Board will determine the exercise price from time to time. Typically, any Incentive Options granted would have an exercise price calculated by reference to a volume weighted average price of the Shares for a period prior to the date of grant.

Number of Incentives to be granted:
The number of Incentives granted under the Incentive Plan will be decided by the Board from time to time.

However, CO2 Group will generally be seeking to take advantage of the form of disclosure relief provided by ASIC Class Order 03/184 in respect of employee incentive schemes. In order to be able to take advantage of that form of relief, the maximum number of securities which may be granted to employees under incentive plans (including the Incentive Plan and the Existing ESOP) in a rolling 5 year period is 5% of the issued share capital of the Company (calculated at the date of the offer under the Incentive Plan), subject to a range of exclusions, including securities issued under a disclosure document, to certain senior executives or issues of securities outside of Australia.

The Board notes that Performance Rights involve less risk to an employee than Incentive Options, as they do not require the employee to pay any amounts to the Company upon exercise. As a result, where the Board decides to grant Performance Rights, an employee will typically receive fewer Performance Rights when compared with the number of Incentive Options they would have otherwise received under the Incentive Plan or any other employee incentive plan.

Vesting Conditions:
The vesting terms for grants of Incentives under the Incentive Plan will be decided by the Board from time to time.

Where appropriate, and where employees (i.e. senior management) can exercise significant influence over the business, the Board will establish policies on vesting of Incentives using performance hurdles which may be linked to performance over the long term to encourage employees to focus on performance over the long term.

The Board considers that a vesting condition requiring the employee to satisfy a minimum term of employment of 1 year after the date of grant is appropriate, given the current stage of the Company's development.

Vesting on change of control:
Incentives that remain subject to a vesting condition immediately vest and are received or become exercisable by the participant in the event that a takeover bid is made for CO2 Group, or another corporate transaction is pursued (such as a scheme of arrangement, selective capital return etc) which results in the bidder acquiring voting power to more than 50% of CO2 Group.

Incentives will lapse on their expiry date.

Vesting in other circumstances:
The Board may permit a participant to exercise Incentives or have such Incentives vested, in other limited situations, such as where a resolution is passed approving the disposal of CO2 Group's main undertaking or on a winding up of CO2 Group.

Expiry Date:
The Board may set out in an invitation to participate in the Incentive Plan the date and times when any Incentives lapse. The expiry date will be no later than 7 years after the date of grant.

Impact of cessation of employment:

Treatment of Incentives on Cessation of Employment

Cause	Incentives which have not vested	Incentives which have vested
Termination for ill health or death	Immediately lapse unless Board determines otherwise	May be exercised (in the case of ill health) by the participant, or (in the case of death) by the participant's personal representative, until the Incentive lapses
Termination for cause (e.g. fraud, dishonesty, material breach of obligations)	Immediately lapse unless Board determines otherwise	Immediately lapse unless Board determines otherwise
Termination by consent (e.g. resignation)	Immediately lapse unless Board determines otherwise	Are able to be exercised during the period 30 days after cessation of employment or a longer period allowed by the Board
Redundancy, constructive dismissal, other termination by Company not dealt with above	Incentives automatically vest and are able to be exercised during the period 30 days after cessation of employment or a longer period allowed by Board	Are able to be exercised during the period 30 days after cessation of employment or a longer period allowed by the Board

Exercise into acquirer shares:

Subject to the ASX Listing Rules, the Incentive Plan provides flexibility for CO2 Group to agree with any successful acquirer of CO2 Group to an arrangement whereby Incentives will become exercisable or vest into shares of the successful acquirer or its parent in lieu of Shares. Any such exercise or vesting will be on substantially the same terms and subject to substantially the same conditions as the holder may exercise or vest Incentives to acquire Shares, but with appropriate adjustments to the number and kind of shares subject to the Incentives, as well as to any exercise price.

Entitlement for Incentives:

Subject to the terms of the Incentive Plan, vesting and the satisfaction of any performance conditions, each Incentive entitles the holder to receive one Share in CO2 Group.

Trust structure

Once an Incentive is capable of being exercised the Board will instruct the Trustee to subscribe for, acquire and / or allocate the Shares the participant is entitled to under the Incentive, and the Trustee will hold those Shares on behalf of the participant in accordance with the Trust Deed.

The Board will provide the required funds to the Trustee. The Board in its absolute discretion may instruct the Trustee to either subscribe for new Shares or acquire Shares on market, or a combination of both. The legal title in the participant's Shares will be held in the name of the Trustee, with the participant holding a beneficial interest in those Shares.

Restriction of disposal of Shares

The Board in its absolute discretion may determine that a restriction period of a maximum of 7 years from the grant of the incentive will apply to some or all of the Shares the holder is entitled to under the Incentive. The holder is not entitled to dispose or deal with the Shares whilst they are restricted.

The Board may approve the withdrawal of the Shares from the Trust if the participant submits a withdrawal notice in respect of unrestricted Shares, the holder ceases to be an employee of CO2 Group, or 7 years has elapsed from the grant of the incentive.

Transferability:

Incentives are only transferable upon a takeover bid where the Incentives are transferred to the bidder, upon a scheme of arrangement where the Incentives are transferred to the acquirer, by force of law upon death of the Incentive holder or upon bankruptcy of the Incentive holder, or otherwise with the consent of the Board.

Right to participate in dividends:

Incentives will not entitle the holder to any dividends (or Shares or rights in lieu of dividends) declared or issued by the Company.

Any dividends payable on the Shares held by the Trustee will be paid by the Company to the Trustee. The Trustee will then distribute the dividends to the participant.

Adjustment for rights issues:

The exercise price of Incentives (if applicable) will be adjusted in the manner provided by the ASX Listing Rules in the event of the Company conducting a rights issue prior to the lapse of the relevant Incentive.

6000922/28

Other rights to participate in bonus issues, reorganisations and new issues etc:

If the Company completes a bonus issue during the term of an Incentive, the number of Shares the holder is then entitled to will be increased by the number of Shares which the holder would have been issued in respect of Incentives if they were exercised (in the case of Incentive Options) or are vested and are received (in the case of Performance Rights) immediately prior to the record date for the bonus issue.

In the event of any reorganisation (including consolidation, subdivision, reduction or return) of the issued capital of the Company, the number of Incentives to which the holder is entitled or the exercise price of the Incentives (if applicable), or both as appropriate, will be adjusted in the manner provided for in the Listing Rules.

Subject to the terms of the Incentive Plan and as otherwise set out above, during the currency of the Incentives and prior to their exercise (in the case of Incentive Options) or vesting and receipt (in the case of Performance Rights), the holder is not entitled to participate in any new issue of securities of the Company as a result of their holding the Incentives.

Listing: The Incentives will not be listed.

Board discretion: Notwithstanding the Board's current policy, under the terms of the Incentive Plan, the Board has absolute discretion to determine the exercise price, the expiry date and vesting conditions of any grants made under the Incentive Plan, without the requirement for further Shareholder approval.

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25

6000922/28

ANNEXURE D

INDEPENDENT EXPERT'S REPORT

CO2 GROUP LIMITED

Independent Expert's Report

27 July 2011

BDO

Financial Services Guide

27 July 2011

BDO Corporate Finance (WA) Pty Ltd ABN 27 124 031 045 ("BDO" or "we" or "us" or "ours" as appropriate) has been engaged by CO2 Group Limited ("CO2 Group") to provide an independent expert's report on the proposal to approve the exercise of CO2 Group options held by Gabor Holdings Pty Ltd and its associates. You will be provided with a copy of our report as a retail client because you are a shareholder of CO2 Group.

Financial Services Guide

In the above circumstances we are required to issue to you, as a retail client, a Financial Services Guide ("FSG"). This FSG is designed to help retail clients make a decision as to their use of the general financial product advice and to ensure that we comply with our obligations as financial services licensees.

This FSG includes information about:

Who we are and how we can be contacted;
The services we are authorised to provide under our Australian Financial Services Licence, Licence No. 316158;
Remuneration that we and/or our staff and any associates receive in connection with the general financial product advice;
Any relevant associations or relationships we have; and
Our internal and external complaints handling procedures and how you may access them.

Information about us

BDO Corporate Finance (WA) Pty Ltd is a member firm of the BDO network in Australia, a national association of separate entities (each of which has appointed BDO (Australia) Limited ACN 050 110 275 to represent it in BDO International). The financial product advice in our report is provided by BDO Corporate Finance (WA) Pty Ltd and not by BDO or its related entities. BDO and its related entities provide services primarily in the areas of audit, tax, consulting and financial advisory services.

We do not have any formal associations or relationships with any entities that are issuers of financial products. However, you should note that we and BDO (and its related entities) might from time to time provide professional services to financial product issuers in the ordinary course of business.

Financial services we are licensed to provide

We hold an Australian Financial Services Licence that authorises us to provide general financial product advice for securities to retail and wholesale clients.

When we provide the authorised financial services we are engaged to provide expert reports in connection with the financial product of another person. Our reports indicate who has engaged us and the nature of the report we have been engaged to provide. When we provide the authorised services we are not acting for you.

General Financial Product Advice

We only provide general financial product advice, not personal financial product advice. Our report does not take into account your personal objectives, financial situation or needs. You should consider the appropriateness of this general advice having regard to your own objectives, financial situation and needs before you act on the advice.

BDO CORPORATE FINANCE (WA) PTY LTD

BDO
Financial Services Guide
Page 2

Fees, Commissions and Other Benefits that we may receive

We charge fees for providing reports, including this report. These fees are negotiated and agreed with the person who engages us to provide the report. Fees are agreed on an hourly basis or as a fixed amount depending on the terms of the agreement. The fee for this engagement is approximately $28,000.

Except for the fees referred to above, neither BDO, nor any of its directors, employees or related entities, receive any pecuniary benefit or other benefit, directly or indirectly, for or in connection with the provision of the report.

Remuneration or other benefits received by our employees

All our employees receive a salary. Our employees are eligible for bonuses based on overall productivity but not directly in connection with any engagement for the provision of a report. We have received a fee from CO2 Group for our professional services in providing this report. That fee is not linked in any way with our opinion as expressed in this report.

Referrals

We do not pay commissions or provide any other benefits to any person for referring customers to us in connection with the reports that we are licensed to provide.

Complaints resolution

Internal complaints resolution process

As the holder of an Australian Financial Services Licence, we are required to have a system for handling complaints from persons to whom we provide financial product advice. All complaints must be in writing addressed to The Complaints Officer, BDO Corporate Finance (WA) Pty Ltd, PO Box 700 Subiaco WA 6872.

When we receive a written complaint we will record the complaint, acknowledge receipt of the complaint within 15 days and investigate the issues raised. As soon as practical, and not more than 45 days after receiving the written complaint, we will advise the complainant in writing of our determination.

Referral to External Dispute Resolution Scheme

A complainant not satisfied with the outcome of the above process, or our determination, has the right to refer the matter to the Financial Ombudsman Service ("FOS"). FOS is an independent organisation that has been established to provide free advice and assistance to consumers to help in resolving complaints relating to the financial service industry. FOS will be able to advise you as to whether or not they can be of assistance in this matter. Our FOS Membership Number is 12561.

Further details about FOS are available at the FOS website www.fos.org.au or by contacting them directly via the details set out below.

Financial Ombudsman Service
GPO Box 3
Melbourne VIC 3001
Toll free: 1300 78 08 08
Facsimile: (03) 9613 6399
Email: [email protected]

Contact details

You may contact us using the details set out at the top of our letterhead on page 1 of this FSG.

BDO

1 Introduction 1
2 Summary and Opinion 1
3 Scope of the Report 4
4 Outline of the Transaction 5
5 Profile of CO2 Group 6
6 Economic analysis 13
8 Industry analysis 14
9 Valuation approach adopted 17
10 Valuation of CO2 Group prior to Transaction 18
11 Valuation of CO2 Group following the transaction 25
12 Is the transaction fair? 26
13 Is the transaction reasonable? 26
14 Conclusion 26
15 Sources of information 29
16 Independence 29
17 Qualifications 30
18 Disclaimers and consents 30

Appendix 1 - Glossary

Appendix 2 - Valuation Methodologies

BDO

Tel: +61 8 6382 4600

Fax: +61 8 6382 4601

www.bdo.com.au

38 Station Street

Subiaco, WA 6008

PO Box 700 West Perth WA 6872

Australia

27 July 2011

The Directors

CO2 Group Limited

Level 11, 225 St Georges Terrace

Perth WA 6000

Dear Sirs

INDEPENDENT EXPERT'S REPORT

1 Introduction

Gabor Holdings Pty Ltd (“Gabor Holdings”) and other entities controlled by Mr Ian Trahar is a major shareholder of CO2 Group Limited (“CO2 Group” or “the Company”), holding an interest in 116,831,546 shares representing 41.79% of CO2 Group shares and 67,737,796 CO2 Group options. Avatar Industries Pty Ltd, an associate of Gabor Holdings has agreed to acquire an additional 22,222,222 CO2 Group options from Crestpark Investments Pty Ltd subject only to shareholders’ approval. Together, Gabor Holdings and its associates may own up to 89,960,018 CO2 Group options (“Gabor Options”).

Approval is being sought for the exercise of any Gabor Options that would result in an increase in Gabor Holdings and its associates’ voting power by more than the ‘3% creep in six months’ exemption under Section 611 of the Corporations Act 2001 (“Corporations Act”).

2 Summary and Opinion

2.1 Purpose of the report

The directors of CO2 Group have requested that BDO Corporate Finance (WA) Pty Ltd (“BDO”) prepare an independent expert’s report (“our Report”) to express an opinion as to whether or not the exercise of any Gabor Options (“the Transaction”) is fair and reasonable to the non associated shareholders of CO2 Group (“Shareholders”).

Our Report is prepared pursuant to Section 611 of the Corporations Act and is to be included in the Explanatory Memorandum for CO2 Group in order to assist the Shareholders in their decision whether to approve the Transaction. The Company has convened an extraordinary shareholders meeting for 31 August 2011.

2.2 Approach

Our Report has been prepared having regard to Australian Securities and Investments Commission (“ASIC”) Regulatory Guide 111 (“RG 111”), ‘Content of Expert’s Reports’ and Regulatory Guide 112 (“RG 112”) ‘Independence of Experts’.

In arriving at our opinion, we have assessed the terms of the Transaction as outlined in the body of our Report. We have considered:

BDO

Whether the value of a Company share is higher or lower following the Transaction;
Other factors which we consider to be relevant to the Shareholders in their assessment of the Transaction; and
The position of Shareholders should the Transaction not proceed.

2.3 Opinion

We have considered the terms of the Transaction as outlined in the body of our Report and have concluded that the Transaction is fair and reasonable to Shareholders.

2.4 Fairness

In section 11, we determined the value of a CO2 Group share prior to the Transaction as compared to the value of a CO2 Group share following the Transaction to be as detailed hereunder.

	Ref	Low $	High $
Value of a CO2 Group share prior to the Transaction	9.3	0.0598	0.0598
Value of CO2 Group share following the Transaction	10	0.0744	0.0813

The above valuation ranges are graphically presented below:

The above pricing indicates that the Transaction is fair to Shareholders.

BDO

2.5 Reasonableness

We have considered the analysis in section 12 of our Report, in terms of both:

advantages and disadvantages of the Transaction; and
alternatives, including the position of Shareholders if the Transaction does not proceed.

In our opinion, the position of Shareholders if the Transaction is approved is more advantageous than the position if the Transaction is not approved. Accordingly, we believe that the Transaction is reasonable to Shareholders.

The respective advantages and disadvantages considered are summarised below:

Section	Advantages	Section	Disadvantages
12.1	The Transaction is fair	12.2	Dilution of Shareholders' interests
12.1	Cash injection is well timed to fund the anticipated growth of the Company
12.1	Increased commitment by CO2 Group's major shareholder
12.1	No capital raising costs will be incurred by CO2 Group

Other key matters we have considered include:

Section	Description
12.3	There is no alternative proposal
12.4	Gabor Holdings and its associates may achieve a maximum voting interest of 55.96%, or 47.55% assuming all Expiring Options are exercised.
12.5	Liquidity of CO2 Group shares may increase as a result of an increase in the number and free float of shares, or decrease if the market holds a negative perception of the presence of a substantial shareholder in the Company.
12.6	CO2 Group's share price may decline if, contrary to market expectations, the Transaction is not approved.

BDO

3 Scope of the Report

3.1 Purpose of the Report

Gabor Holdings and its associates own 41.79% of the shares in CO2 Group. Section 606 of the Corporations Act expressly prohibits the acquisition of further shares by a party who already holds (with associates) more than 20% of the issued shares of a public company, unless a full takeover offer is made to all shareholders.

The Corporations Act also specifies a list of acquisitions that are exempt from the Section 606 prohibition. One exemption is the ‘3% creep in six months’ provision that allows the acquiring parties to have a voting power in the company of not more than three percentage points higher than they had six months before the acquisition.

Section 611 also permits such an acquisition if the shareholders of that entity have agreed to the issue of such shares. This agreement must be by resolution passed at a general meeting at which no votes are cast in favour of the resolution by any party who is associated with the party acquiring the shares, or by the party acquiring the shares.

Approval is being sought for the exercise of any Gabor Options that would result in an increase in voting power by more than the ‘3% creep in six months’ exemption under Section 611 of the Corporations Act.

Section 611 states that shareholders of the company must be given all information that is material to the decision on how to vote at the meeting.

Regulatory Guide 74 issued by ASIC deals with "Acquisitions Agreed to by Shareholders". It states that the obligation to supply shareholders with all information that is material can be satisfied by the non-associated directors of CO2 Group, by either:

undertaking a detailed examination of the Transaction themselves, if they consider that they have sufficient expertise; or
by commissioning an Independent Expert's Report.

The directors of CO2 Group have commissioned this Independent Expert's Report to satisfy this obligation.

3.2 Regulatory guidance

The Corporations Act does not define the meaning of "fair and reasonable". In determining whether the Transaction is fair and reasonable, we have had regard to the views expressed by ASIC in RG 111. This regulatory guide provides guidance as to what matters an independent expert should consider to assist security holders to make informed decisions about transactions.

This regulatory guide suggests that where the transaction is a control transaction the expert should focus on the substance of the control transaction rather than the legal mechanism to affect it. RG 111 suggests that where a transaction is a control transaction it should be analysed on a basis consistent with a takeover bid.

In our opinion the Transaction is a control transaction as defined by RG 111 and we have therefore assessed the Transaction to consider whether in our opinion it is fair and reasonable to Shareholders.

BDO

3.3 Adopted basis of evaluation

RG 111 states that a transaction is fair if the value of the offer price or consideration is greater than the value of the securities subject of the offer. This comparison should be made assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm's length. When considering the value of the securities subject of the offer in a control transaction the expert should consider this value inclusive of a control premium. Further to this, RG 111 states that a transaction is reasonable if it is fair. It might also be reasonable if despite being ‘not fair’ the expert believes that there are sufficient reasons for security holders to accept the offer in the absence of any higher bid.

Having regard to the above, BDO has completed this comparison in two parts:

A comparison between the value of a CO2 Group share prior to the Transaction and the value of a CO2 Group share following the Transaction (fairness - see section 11 "Is the Transaction Fair?"); and
An investigation into other significant factors to which Shareholders might give consideration, prior to approving the resolution, after reference to the value derived above (reasonableness - see section 12 "Is the Transaction Reasonable?").

This assignment is a Valuation Engagement as defined by APES 225 Valuation Services. A Valuation Engagement means an engagement or assignment to perform a valuation and provide a valuation report where we determine an estimate of value of the Company by performing appropriate valuation procedures and where we apply the valuation approaches and methods that we consider to be appropriate in the circumstances.

4 Outline of the Transaction

The Company seeks to obtain Shareholders' approval for the exercise of the Gabor Options, which may increase the shareholding of Gabor Holdings and its associates from 41.79% up to 55.96% assuming that only the Gabor Options are exercised. The capital structure of CO2 Group is analysed under two possible scenarios after the Transaction.

Under Scenario 1, it is assumed that only the Gabor Options are exercised resulting in new CO2 Group shares to be issued.

Under Scenario 2, it is assumed that all the 12-cents listed options expiring on 12 November 2011 including Gabor Options ("Expiring Options") are exercised.

Ordinary Shareholding Interests

	Pre Transaction		Post Transaction		Post Transaction
	No. of Shares	%	Scenario 1	No. of Shares	Scenario 2	%
Current ordinary Shareholders	162,725,980	58.21%	162,725,980	44.04%	162,725,980	37.42%
Gabor Holdings and its associates	116,831,546	41.79%	206,791,564	55.96%	206,791,564	47.55%
Current option holders	-	0.00%	-	0.00%	65,356,265	15.03%
Total shares	279,557,526	100.00%	369,517,544	100.00%	434,873,809	100.00%

BDO

Under Scenario 1, where only the Gabor Options are exercised, Gabor Holdings and its associates could theoretically increase their ordinary shareholding interests from 41.79% up to 55.96%.

Under Scenario 2, where all the Expiring Options are exercised, Gabor Holdings and its associates may increase their ordinary shareholding interests from 41.79% up to 47.55%.

Voting Interests

CO2 Group has 30,150,189 convertible preference shares (“CPS”) outstanding. Based on the terms and conditions of the CPS, there is little incentive to convert the CPS into ordinary shares until the Company pays dividends. CO2 Group has not paid dividends in the past and as there is no indication that it will pay dividends in the near future, we have not considered the conversion of the CPS in our analysis above.

However, in certain circumstances set out in Australian Securities Exchange (“ASX”) Listing Rule 6.3 and in no others, the CPS hold the same voting rights as ordinary fully paid shares. Therefore, our analysis of voting interests differs slightly from our analysis of ordinary shareholding interests as follows.

	Pre Transaction		Post Transaction		Post Transaction
	No. of Shares	%	Scenario 1		Scenario 2
			No. of Shares	%	No. of Shares	%
Current ordinary Shareholders	162,725,980	52.54%	162,725,980	40.72%	162,725,980	34.99%
Gabor Holdings and its associates	116,831,546	37.72%	206,791,564	51.74%	206,791,564	44.47%
Current option holders	-	0.00%	-	0.00%	65,356,265	14.06%
Current holders of CPS	30,150,189	9.74%	30,150,189	7.54%	30,150,189	6.48%
Total shares	309,707,715	100.00%	399,667,733	100.00%	465,023,998	100.00%

Under Scenario 1, where only the Gabor Options are exercised, Gabor Holdings and its associates may theoretically increase its control from 37.72% up to 51.74%.

Under Scenario 2, where all the Expiring Options are exercised, Gabor Holdings and its associates may increase its control from 37.72% to 44.47%.

5 Profile of CO2 Group

5.1 History

Previously a mineral resource exploration company operating as Revesco Group Limited, the Company was renamed CO2 Group in September 2004 to carry on a new business of providing environmental services, primarily carbon sequestration (that is, the establishment of carbon sinks).

CO2 Australia Limited, a 100% fully owned entity and the main operating entity of the CO2 Group, is the Australian market leader in the establishment and management of forest carbon sinks intended for registration under formal emissions reduction schemes.

Major events of the Company’s history are summarised in the following table.

BDO

Year	Highlights
2004	Became the first reforestation company to be accredited under the New South Wales Greenhouse Gas Abatement Scheme (GGAS).
Announced a contract to supply carbon credits to Origin Energy.
2005	Entered into contracts to establish forest carbon sinks for Country Energy and Eraring Energy. Eraring Energy has built its forest carbon sink portfolio every year since.
2006	Entered into a joint venture with Macquarie Bank Limited to establish and manage a forest carbon sink.
Engaged by the Victorian Department of Sustainability and Environment to undertake plantings.
Became the first Australian Associate Member and a listed Offset Provider under the Chicago Climate Exchange.
2007	Became the first reforestation company to become an accredited abatement provider under the Australian Government’s Greenhouse Friendly™ program and won new contracts to establish and manage forest carbon sinks on behalf of Qantas Airways, Woodside Energy, the City of Sydney, EDS Australia and the Big Day Out.
2008	Announced projects for INPEX/Total Browse JV, Newmont Mining Corporation, Rip Curl, and successfully completed a takeover bid for the Oil Mallee Company of Australia.
2009	Signed carbon offset deal with Wannon Regional Water Corporation to build and operate a carbon offset project by establishing permanent forest carbon sink using Mallee trees.
Signed agreement with ACTEW Corporation to provide accredited forest carbon sink offsets.
Woodside exercised option to undertake approximately $75 million worth of additional forest carbon sink plantings, creating Australia’s largest commercial emissions offset programme based on dedicated forest carbon sink plantings.
2010	Expanded its carbon estate to approximately 16,500 hectares across New South Wales, Western Australia and Victoria.
Planted trees for ACTEW Corporation, Woodside Energy, Newmont Mining Corporation, Eraring Energy, Victorian Department of Sustainability and Environment and a number of other clients.

CO2 Group has grown to include a staff of 31 in-house professionals located across six offices in three Australian states. In addition to new planting activities, CO2 Group continues to manage forest carbon sink plantings that have been established in previous years.

CO2 Group changed its financial year end from 30 June to 30 September in 2010. Its first new reporting period was for a 15-month period ended 30 September 2010. The Company has increased its revenue from continuing operations from $14.8 million for the year ended 30 June 2009 to $15.0 million for the half year ended 31 March 2011. CO2 Group’s total contract value to date is over $160 million. CO2 Group has well progressed discussions with a number of prospective clients although some of these opportunities have been held back by uncertainty in the market. The Company believes that recent political policy developments are likely to bring some of these opportunities to fruition.

BDO

5.2 Historical statement of financial position

	Unaudited as at 31-May-11	Reviewed as at 31-Mar-11	Audited as at 30-Sep-10
Statement of financial position	$000	$000	$000
Current assets
Cash and cash equivalents	14,550	14,543	17,365
Trade and other receivables	495	262	576
Inventories	5,307	5,180	7,244
Other current assets	327	315	199
Accrued income	816	509	480
Total current assets	21,495	20,809	25,864
Non-current assets
Investments accounted for using the equity method	28	62	-
Other financial assets	314	314	314
Property, plant & equipment	4,477	4,513	4,727
Deferred tax assets	4,338	4,340	2,572
Intangible assets	1,500	1,446	1,404
Total non-current assets	10,657	10,675	9,017
Total assets	32,152	31,484	34,881
Current liabilities
Trade and other payables	3,912	5,425	5,349
Borrowings	8	8	48
Current tax liabilities	2,882	3,635	1,177
Provisions	409	409	473
Deferred income	8,206	4,875	12,257
Total current liabilities	15,417	14,352	19,304
Non-current liabilities
Borrowings	20	21	25
Provisions	79	79	80
Total non-current liabilities	99	100	105
Total liabilities	15,516	14,452	19,409
Net assets	16,636	17,032	15,472
Equity
Issued capital	30,663	30,663	30,658
Reserves	6,653	6,648	6,631
Accumulated losses	(20,680)	(20,279)	(21,817)
Total equity	16,636	17,032	15,472

Source: Annual Report 30 September 2010, Half-year Report 31 March 2011 and management accounts 31 May 2011

BDO

We note the following in relation to the Company's recent financial position:

The CO2 Group has significant cash reserves of $14.6 million at 31 May 2011 ($17.4 million at 30 September 2010), accounting for 45% of total assets and 87% of net assets. These cash reserves reflect upfront funding of carbon sinks projects to be undertaken for its clients.
Inventories, which primarily relate to seeds and carbon sinks under development, decreased from $7.2 million as at 30 September 2010 to $5.3 million as at 31 May 2011 reflecting the progressive completion of carbon sink projects.
Deferred tax assets, which primarily relate to carbon sinks, increased by $1.8 million from 30 September 2010 to 31 May 2011.
Deferred income relates to payments received upfront for carbon sink projects. This balance reduces as income is progressively recognised in accordance with development costs being expended.
CO2 Group is still in a development phase with accumulated capital losses of $20.7 million as at 31 May 2011.

5.3 Historical statement of comprehensive income

	6 months to	15 months to
	31-Mar-11	30-Sep-10
Statement of comprehensive income	$'000	$'000
Revenue from continuing operations	15,044	27,714
Other income	9	-
Total revenue	15,053	27,714
Expenses
Employee benefits expense	(1,910)	(4,800)
Depreciation and amortisation expense	(264)	(1,256)
Consulting expense	(97)	(252)
Legal fees	(120)	(311)
Travel	(410)	(861)
Insurance	(122)	(289)
Rent	(370)	(853)
Research and development	(109)	(259)
Other expenses	(500)	(1,221)
Marketing	(93)	(259)
Impairment loss	(94)	(5,515)
Plantation costs	(8,692)	(16,527)
Finance costs	(3)	(13)
Share of net loss of associates and joint venture partnership accounted for using equity method	(40)	-
	(12,824)	(32,416)
Profit/(loss) before income tax expense	2,229	(4,702)
Income tax (expense) / benefit	(691)	1,356
Net profit /(loss)	1,538	(3,346)

Source: Annual Report 30 September 2010 and Half-year Report 31 March 2011

BDO

A significant impairment loss of $5.5 million occurred in the 15-month period ended 30 September 2010 in relation to intangible assets associated with Mallee plantings in Western Australia and other assets that CO2 Group consolidated as part of the acquisition of the Oil Mallee Company of Australia Ltd (“OMC”). This intangible asset reflects goodwill acquired in the business combination with OMC. This impairment loss resulted in a net loss of $3.3 million for the period.

We note the following in relation to the Company’s recent financial performance:

Revenue increased from an average of $1.8 million per month over the 15-month period to 30 September 2010 to an average of $2.5 million per month for the 6-month performance to 31 March 2011, illustrating the growing base of annuity income being generated from the Company’s long term contracts.
CO2 Group returned net profit of $1.5 million for the half year ended 31 March 2011 after a net loss of $3.3 million in 15-month period to 30 September 2010.