** This issue is addressed in ArcGIS 9.0 Service Pack 2 (SP2) **
Modifying language level to level 2 on EPS export options dialog does not properly update image compression settings and therefore produces incorrect output.
For example, if the EPS export option is initially set to PS Level 2, the compression is still processed as flate even though the dialog indicates RLE encoding.
This is a known issue.
** This issue is addressed in ArcGIS 9.0 Service Pack 2 (SP2).
Click on the link in Related Information below and download Service Pack 2, if necessary. **
If the Service Pack 2 is unavailable, work around this issue by manually specifying PS level 2. Change the output compression setting to LZW, then back to RLE. This will ensure that the RLE encoding setting is used.