Chris,
I went through the same trouble when I first started using e-smith 4.1.2. The fix Charlie suggested never quite worked (maybe I messed it up), anyway I developed my own patch, which worked fine. I cannot guarantee it worked after an upgrade, but it certainly resolved my problems.
Having said all that, I was setting up a new 5.5 server, and used a different modem, and it worked straight away. I thought maybe the modem was the problem, and as bazar as that sounds, that is exactly what it was. I tried using a cheap ABC 56K Modem, and it would not stay connected, yet by replacing the modem with a Netcomm 56K, SME 5.5 worked with no modifications. I then tested with a US Robotics modem, and again it worked with no modifications.
So, you may not need to modify at all. I now have two different servers both running SME 5.5 with Update 2, with no modifications on BigPond Direct Permanent modem connections. Both are using Netcomm 56K modems.
Hope this helps.
James