I am running analog in through the FR and FL 7.1 inputs. I am curious if I add a little EQ does it convert the analog signal to digital add the EQ and then convert the signal back to analog? Would it be better to send a digital signal if one wanted to add a bit of EQ?

To my knowledge, the 7.1 input is purely analog in to out, with no DSP. The four stereo analog input are always digitized, hence the DSP is applied/available, including crossover, EQ, time alignment and bass management.

So if you intend to use DSP, it is indeed best to use a digital input. The 976 D/A are plenty good imho.

I decided to use the EQ in Roon. I'm using 3 PEQ points to smooth things out. Sounds amazing. The reason I asked was if you activate eq when using 7.1 in it turns on. It doesn't seem to do anything eq wise but it does diminish the SQ slightly. I was wondering if it converted A to D and back to A without adding EQ.

It is somewhat envolved to implement 8 channels of analog parametric EQ in an audio device, let alone one controled by a menu GUI. You can rest assured it was not done in the 976 and if any processing exists it will be in DSP!

You should reconsider your aversion to digital conversion and DSP. It is mostly transparent there days. If the source is already digital, feeding the 976 digitally and using its great DAC is a perfectly good solution imho!

I'm not adverse to using DSP. I'm using the Roon DSP engine which is adding EQ in the digital stage before sending PCM to my DAC. It is also adjusting dynamic range to eliminate any clipping. It shows all these adjustments and also lets you know the quality of the signal. The PEQ in Roon is far more sophisticated and allows adjustments for every channel like the 976. I'm not knocking Outlaw I love my 976/7000 combo. It's a huge improvement in SQ over the Denon AVR they replaced.