Is it only FM? I've not found an AM stations with it.

Good question. Don't know. It's either: a) RDS is FM-only, or b) None of your local AM stations are broadcasting RDS.

Why does it sometimes stay on and sometimes flash?

Does it flash steadily or intermittently? If intermittently, I would assume it is due to signal strength and the signal is dropping in and out.

I've heard that if your radio supports this, it monitors all frequencys for it all the time so that reguardless of the station your listening to, if a traffic report is played, the tuner would play that and then go back to your music. Is this the way it works?

This is called TA (Traffic Announce), and it is not in the current version of the software. A future release of the software will be TA-capable (although I don't know if it will be in 2.0 or not).

I don't know where you live, but your local radio stations would also have to broadcast the necessary TA information in order for it to work.

If I tune to one particular FM station where the RDS lits up, I get a clock in the lower right hand corner.

Wow, I've never seen the RDS clock on mine. That's cool. I guess none of my local stations broadcasts an RDS clock.

It's there until I turn the radio off and then I have to go to that one station again to get it back. Why is this?

Because, until you tune to a station that broadcasts an RDS clock, the player can't get the clock signal.

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Tony Fabris