I SOLVED IT!
This problem was plaguing me for a year, until my cousin suggested I try to fix it the other day when I was running dial-up at my relative's place and it happened. So I found this forum plus the other page that offered the Adobe solution (which didn't work by the way).
Actually, the problem for me extended beyond just dial-up. I connect to my DSL then to another ISP, and when I connect the 2nd ISP it does the freeze thing. It also happens when I connect via VPN to my college network. So I knew it couldn't be soley a modem issue.
Solution: Get rid of or uninstall IPv6.
How I came to this conclusion:
I was at the Microsoft knowledge base on how to reset TCP/IP settings which didn't solve it. So I went to the related page of figuring out if the Winsock had been corrupt. I did what they told me and got netdiag tool off the WinXP cd. I ran the program for /test:winsock /v. It passed the test, but there was something that caught my eye. It said that the "Microsoft Tun Miniport Adapter" may not be working. I also noticed that the message would not be there when I connected to my second ISP or through dial-up, and that the adapter was active. So I did some research and found that it was connected to IPv6 (Internet Protocol version 6). IPv6 was part of some SP1 Windows Update download if one chose to install it. I suspect that my laptop (which is a year old) came with it installed already. Anyway, I disabled the Microsoft Tun Miniport Adapter and it SOLVED IT! (You can do this by going into your Device Manager, show hidden devices, and disable it under Network Adapters.)
So I went a step further and found out how to uninstall IPv6 altogether. You can do so by opening up a command prompt and typing in "netsh interface ipv6 uninstall".
Though, I still haven't been able to uninstall the Microsoft Tun Miniport Adapter even after I uinstalled IPv6, but it doesn't cause an issue. Hoewver, I still keep it disabled.
Recap: Get rid of IPv6. Go to command prompt and type "netsh interface ipv6 uninstall"
I really hopes this helps those who've suffered from the same issue and haven't been able to solve it for ages. I was just lucky to stumble upon it.