We have a winXP build pc, and use Visual Build Pro 6 to build our software. since some of our developers use VS 2010 the project files now contain reference to "tool version 4.0" and from what I can tell, this tells Visual Build it needs to find a sdk7.x somewhere, even though we only build for .NET 3.5. This caused it not to find lc.exe. I tried to fool it by pointing all the macros to the 6.0A sdk that came with VS2008 which is installed on the pc, but that did not work.
I eventually got it working by downloading and installing sdk 7.1. I then created a registry key for 7.0A and pointed the install path to the install path of the 7.1 sdk. now it happily finds a compatible "lc.exe" and all the code compiles fine. I have a feeling I will now also be able to compile .NET 4.0 code even though VS2010 is not installed, but I have not tried that yet.