my polk audio xm tuner xrt-12 is pretty solid and equipped with great dacs. you think i should hook up my polk to my 970 with optical and let my 970 dacs do the work, or hook it up with stereo analog and let the polk audio dacs do it. also if i hook up with stereo analog cables, can i still use 5 channel stereo mode? i think i would be able to.

It certainly wouldn't hurt anything to experiment - run both analog and digital cables and try both (but remember when trying analog to use the stereo bypass mode, since otherwise you will be converting from analog to digital and back to analog in the 970). The 5 Stereo mode is available for both analog stereo and digital PCM stereo sources, so you can use it no matter how you have the XM tuner hooked up.