Did you try to run cl.exe from command line from arbitrary directory?
Probably, nvcc just cannot find cl.exe (when you have to run vsvars32.bat to set up your environment vars) or finds the wrong version (if you have installed also VS2010 or VS7).
I had the same problem with cl.exe. It is taken care of after adding the VStudio path or by running vsvars32.bat. Now I have following error during compile
c:\cuda\include\host_config.h(115) : fatal error C1083: Cannot open include file
: ‘crtdefs.h’: No such file or directory
Any idea what can resolve this problem? I am working on 64-bit Win 7.