Z3 exhaust problem

[B3Svert]

I have a Z3 1.9 that hasn't been driven in over 12 months. I checked the oil, coolant, plugs, belts etc. before starting it to take it for an MOT and it sounded a bit lumpy, rough idling and a very rattly exhaust. The car has always been garaged and has only done 29k since 1997. After replacing some leaking shocks and a broken spring it passed the MOT with the advisory that the Cat or exhaust baffles sounded like they were breaking up.

Car was given to me a few days ago as a freebie, it was my dad's P&J so although I will not be using it much it will be looked after and not sold for the forseeable future. I'm competent enough with a spanner to do minor work on it myself so will shortly be doing an oil and filter service. Everything else feels nice and tight as it should.

Question is, would it be normal that the Cat on a little used car just deteriorates like that? I've had a look under the car and the noise, although difficult to pinpoint without it being up on a ramp, appears to be coming from in front of the Cat. There doesn't look to be any impact damage underneath but the back secion of the exhaust (after the Cat) looks to be a bit rusty.

Video of exhaust noise is here:

http://www.youtube.com/watch?v=LTMecgKmHEs

Any ideas?