I know this is an old post, but I downloaded the sample code for the AVR MT 128. I built it with the latest WinAVR and had no problems.
In WinAVR’s Programmer’s Notepad, I opened the Makefile and did a Tools->Make clean and Tools->Make all
The only odd thing I got was an avr-objcopy.exe message saying “there are no sections to be copied!” and a “never used” message. I ignored those messages because it built a .hex file for me. I loaded the hex through the SFE/Olimex ICSP programmer using PonyProg. It all went very well.
I was able to modify the sample code to dump different text to the LCD just to make sure I was actually loading a new hex.
So, would suggest using WinAVR and PonyProg - compiles and loads fine with this combo.