You tried to make your filenames more clear using periods, bad idea. LaTeX recognizes your 1 (one) as the file ending, which it doesn't recognize.
Try loading package grffile.
I don't know how matlab works, but exporting to pdf (a vector format) is always better. You could export you data as well, and plot it using LaTeX package pgfplots. Pleas have a look at the examples at pgfplots.net.
Hello. Thank you for the reply. Now, I import my graph to latex. However, I have another problem. The figure comes separate the paragraph and located between sentences. It is weird because the code for the figure is located under that paragraph.
I tried to resize the figure but it doesn't work.
Captions and also references are there because it's very common that figures are placed where it's optimal for page breaking and layout proportions.
A bit stretched: the text may say "See figure 1, which describes the process X." Then the figure follows, with a caption Figure1: The process X". And possibly much whitespace after the text before the figure with a page break, because it turned out that the figure doesn't fit well any more to the page after inserting other text... That's why figures are often at the top of a new page, but text is floating before. Anything can move a bit. We got references for pointing to the figures, and captions there to explain them. No need to stick figures at fixed points within the body text.
Often it's sufficient to relax the positioning a bit via options, up to: