Hi Sid,
Are there any possibilities of extending it beyond 8-bit / 44.1 kHz?
The driver currently exposes a stereo, 16-bit, 44.1 kHz on the ALSA side, since that is the lowest quality with which Audacity works in the playback direction.
However, Arduino Duemillanove's ATMega328 is not really capable of 16-bit reproduction in this context: it has one 16-bit and two 8-bit counters, and the 16-bit one is used to derive the 44.1 kHz (PCM) rate, so the only thing available for PWM (analog) reproduction are the 8-bit counters (there is a bit more on this in the paper on the webpage).
So what happens during stereo, 16-bit, 44.1 kHz playback, is that the driver simply extracts the MSB of the left channel, and sends it as an 8-bit sample representation to the Arduino for PWM reproduction.
So in brief - as far as ALSA interfaces are concerned, I believe it is possible to specify any rate you want (which is supported) - however, "by default", it would be easy to only get 8-bit resolution (hardware) reproduction on the Arduino (however, higher rates should in principle be possible; as I think there should still some of bandwidth left, since a duplex operation can be demonstrated at 2Mbps).
Hope this helps, Cheers!
Regards Sid.