Z2 has micro SD slot, so up to 128gb expansion on offer there.
I would think the audio over USB should work with any music player, but certainly at the very least will work with the stock Sony player, which does have usual player features like playlists.
Not sure about ALAC.
The "Direct" output to USB should work with all media players which are using the "Player" component in the Android framework for music playback (basically, what this component does is opening a particular file upon request by the player app, and sending it to rest of the framework; when our high-res is activated, this file is unpacked/decompressend and is then routed directly to the USB driver). I am right now listening to a 88.2kHz file using Google Music, and the DragonFly glows in amber which is the 88.2 kHz indicator.
I am sorry that I cannot publish any screen shots yet, the software is still not finalized.
We currently support FLAC and WAV up to 192kHz. MP3 and AAC are supported at their native sample rates before compression (44.1 or 48kHz). ALAC is not currently supported. I have requested ALAC support, but it has been down-prioritized (and I cannot comment on future products or product updates). If you have ALAC files, you can use XRecode or similar programs to quickly convert between lossless formats without any impact.
Other formats generally supported by Android should work, at those sample rates supported by our chip supplier, but has not been in the scope of this feature and have not been verified - we have focused on formats generally available for high-res downloads.
The available user memory is approximately 12 GB out of the box; this memory is shared with downloaded apps and their data (the rest of the 16GB is reserved for Android and preloaded apps, etc). The SD card slot has been verified for up to 64GB; I hope we will soon be able to verify the new 128GB cards from SanDisk.
I am not sure if can state that we officially "support" this, but for me it works to use a small portable router between the USB OTG cable and the DAC. You can then connect a USB stick and play tracks from that. I will discuss with the product team if this voids your warranty or not....