That version is new enough, it should work fine. This sounds like an environment path issue, scons obviously can't find a compiler for the assembly file for system.dll.
Just out of curiosity, try using VS2005 Express Edition instead of the 2003SDK, MSToolKit, and MASM. Do you absolutely need Windows 95/98/ME compatibility? This is generally for two reasons: using an old toolchain to get said compatibility; and for testing/debugging.
I use VS2008 as it's a nice compromise between compatibility and newness; and install size/time. I think that VS2010 onwards is just bloat, although the code editor in VS2012 is pretty cool.
"Only a MouseHelmet will save you from a MouseTrap" -Jason Ross (Me)
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