The NZ707 has a 7 step bass/treble EQ. It was the major reason why I chose it over the even cheaper NZ505 which also had ATRAC Type R but no EQ, just a 2 step Mega Bass, and Type R was essentially the only thing I wanted a new recorder for. I figured I might do occasional music playback on the 707, so I wanted the EQ, and shelled out a bit more for that.
The Line Out is only useful for car playback, speaker playback, or to output to a headphone amp. Yes EQ is eliminated when the Line Out is on, otherwise the Line Out would be rather pointless. You can't adjust the volume either when the N1 is in Line Out mode. A Line Out is supposed to provide a straight and clean signal to be amplified or screwed around with externally. You wouldn't want to be able to EQ the signal or change its volume, otherwise it's not a true Line Out. Panasonic PCDPs let you use the bass boost through its Line Outs, which is rather dumb, and some MP3/CD players let you adjust the volume of the Line Out, which is again rather dumb.