Your modem (or other connecting device) has reported an error.

The error is, "Your modem (or other connecting device) has reported an error." means simply put, "your modem had a problem".

This could be as simple as rebooting the computer to reset the modem, or giving the modem an extra 15 seconds to disconnect the current session.

Make sure you aren't running any software that uses the modem, ie: fax or answering machine software.

You could try uninstalling, rebooting, reinstalling the modem as per the manufacturer's instructions (make sure you have them handy before you try this).

Maybe get a newer copy of the modem driver and see if that makes a difference.

Possibly uninstall, reboot and reinstall Dial Up Networking.