Hm, I have been having this problem as well. It happened when I tried to install AVRStudio 4, whichever is the latest version 4 but NOT version 5 (man, did I EVER screw up explaining that one :-P ) over Windows 7. I installed AVRStudio 5 and it works like a charm.
I have no idea why it can't find the *.elf file, though, but it is apparently something to do with the makefile that's been generated.
Upside: AVRStudio 5 works swimmingly with Windows 7 and Webbotlib, although I'm using an ISP programmer rather than a bootloader.