I have a Z1 bluetooth update disc., what would happen if i load that into my Z2 ??

nothing its only for Z1

so it wouldnt allow me to bypass my z2 like a z1 with the update ?

Nope.

Or in layman's terms:

The avic just "looks" at the update and says, "this update is earlier than the one I already have, so I'm not going to do anything."

yup completely right spiderman. The Z2 has a newer or equal version to that of the Z1 bluetooth update discs. If the version isnt seen as newer, it will return an error message. That is why the bluetooth discs didnt work on the decemeber 2006 Z1 units because they already had it.