There is something unobvious with the way relative include paths are calculated in AVR Studio 5.0. Usually all the IDE’s compute the relative paths relative to the root directory of the project. But with AVR Studio 5.0 the include paths are calculated relative to the output directory. So whenever you mention a relative path in project properties –> Toolchain –> Include Path(s), please make sure that the path you mention is relative to the output directory. This is typically <project folder>\<configuration>, where project folder is the folder where your project file exists. (.avrgccproj, (or) .avrasmproj).
There are possibilities that a GCC Project in AVR Studio 5.0 will have both source files in C/C++ and .S (preprocessing assembly files). In this case you should watch out for the appropriate section in the Toolchain settings (Project Properties –> Toolchain tab) to mention the include paths. If it is a .S file mention it in the Preprocessing Assembler section, else mention it in the comiler section. Remember the first point while mentioning
Hope this helps…