Since the layer7 patch only contains new files epatch is unable to figure out that it should use -p1, so the files end up in iptables-1.2.11/iptables-1.2.11-stock/extensions instead of iptables-1.2.11/extensions. I have created a new patch based on layer7-0.9.1 which fixes this problem.
Created attachment 39440 [details] files/1.2.11-files/iptables-layer7-0.9.1.patch.bz2
read the metadata :p
1.3 contains the newer l7 stuff, please test it and report back.
re-open if issue isnt resolved with iptables-1.3.2