VBC.exe in Windows 2003 SP1 not able to compile Silverlight 5 code

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I have a software product that calls vbc.exe directly to compile Silverlight code. This compilation of Silverlight VB.Net code has been working in Windows 2003/XP through Windows 2012/8 environments, except for one Windows 2003 SP2 (32-bit) environment where .Net Framework 3.5SP1 and 4.0 are installed.

The error is that System.String and System.Runtime.Serialization.DataContract are unknown types. Has anyone run into vbc.exe not being able to compile Silverlight VB.Net code where the error is that System.String is not recognized, and how did you resolve the issue?

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