cjdelphi:
so why can't it simply loop 3 times and output that back to the speaker?
You could if the AVR analog to digital converter was a 16 bit (or wider) converter.
why would the quality decrease based on the fact it's only 8bit buss / processing per cycle/instruction?
It doesn't. The processor's data bus size has nothing to do with the resolution of the analog to digital converter.
If the AVR processor had a fast 16 bit ADC theoretically it would be capable of collecting a CD quality data stream. However, it typically will not have enough processing power to do anything useful with that data stream.
Roughly, the bitness of the ADC determines the quality of the data. The bitness of the processor determines what can be done with that data.