If you're starting a fresh install of 7.10, be sure the external modem
is connected and powered on before you start the install. The
installer should detect the modem, load the drivers, and mark the
dial-up connection as the default route to the Internet.

You will manually configure the connection afterwards: adding your ISP
dial-in number, your user ID and password, and setting an option or two.

Once that's done, Ubuntu will try to connect during boot, even before
you log in to the desktop.

Ian's advice is correct if you are adding an external modem to an
existing configuration - which I haven't tried. Might work on your
5.04 installation.

By the way (almost an afterthought): I'm assuming a serial port
external modem, not a USB external modem. I have no idea if Ubuntu
suppports USB external modems.