I know it needs the valves adjusted. so what exactly would happen if you skipped inspection 2 and never did it. would the valves end up making your motor fail? what kinda damage and such...

I am not a BMW technician. However it's been my impression that usually most of the valves are still within spec and sometimes all of them are. Also typically valves get looser with more miles rather than tighter. Tighter might mean a burned valve. But more likely you would just notice a little more valve noise and slightly less performance.

Oil change is included with Inspection 2, so you better at least change the oil and filter. Also, all the fluids and filters are changed, and I think the spark plugs might get changed on an M3. and the valves should be adjusted too. The valves that need adjusting are likely looser than specs. like he said, could cause loss of a few HP, and definately more valve noise. it could cause more issues further down the line though becuase the rocker arm is going to be slapping the top of the valve every time.