> Unknown graphics extension: .eps
so you're running under pdftex.
in the absence of any detail about your document, i guess you've got
code that attempts to detect whether it's running under latex or
pdflatex
so you have something like
<broken code setting \ifpdf>
\ifpdf
\usepackage[pdftex]{graphicx}
% this forces pdf output if you weren't under pdftex to start with
\else
\usepackage[dvips]{graphicx}
\fi
there are two recommendations
1. use \usepackage{ifpdf} instead of your "broken code..."
2. forget about that code altogether. the graphics package (and
graphicx and all the non-recommended stuff that uses it like
epsfig) knows what it's doing, so all the above can be replaced by
just
\usepackage{graphicx}
and graphics' configuration files will decide (correctly) whether
to use pdftex or dvips driver.
for details of why this has happened (that is, changed from what used
to happen), see
http://www.tex.ac.uk/cgi-bin/texfaq2html?label=ifpdf
