1. Install AVRStudio 4 (build 684).
2. Install AVRStudio 4 Service Pack 3 (build 716).
3. Install Jungo Driver (installer SP3 will ask you to install and do it).
4. Plug AVRDragon USB cable to PC.
5. Update manually AVRDragon USB driver with following steps:
To works with AVRStudio 4 Service Pack 3 (build 716) AVRDragon firmware should be upgraded or downgraded to version: (M)Master Firmware Version 6.0b, (S)Slave Firmware Version 6.0b.
I downgraded my AVRDragon from (ATmelStudio7.0.1188) with this steps:
Disconnect AVRDragon USB cable and connect again.
And finally you could test your AVRDragon.
In my example I'm using ATmega8535 target microcontroller
Connect ISP cable to from 6pin header to ATmega8535. The target microcontroller ATmega8535 is external powered with 5V, common ground (GND) and external connected with 4MHz crystal.