I am trying to connect a laptop computer with Windows XP to a IBM x235 Server running server 2003. It connects once but after that I get error 721 with the remote computer did not respond. It also won't connect if I change IP settings on the server without a restart. I left the server all all night last night after a restart and then this morning tested the connection again but got the error 721 again.

I found your site and looked at the modem logs but they both say that the other modem dropped the connection so I don't know which is causing the problem? However they both say data compression is on or unknown? is that the issue, where do I change that?

Any help would be very much appreciated!

Error 721 will occur after the 2 modems have completed handshake & indicates a failure to authenticate the session; the problem is probably not 'the modems'.
However, if you are using 56k modem at either or both ends, would definitely suggest disabling 56k protocol on them since it cannot be achieved & can cause problems in some cases if it is not disabled
www.modemsite.com/56k/ms.asp

Message in modem log that error correction is [off] or unknown would indicate the driver (.inf file) fails to define the CONNECT response the modem returns; this by itself is not a problem so long as error correcdtion really is ON. Perhaps you should post the modem log and tell us what kind of modems you are using?