Unfortunately, it does erase everything on the phone. Contacts and such can be synched to your Windows Live accounts though.
Were you previously able to connect to Zune? If not, you don't really have a lot on it atm and hopefully you will be able to get everything back.
RE Backing everything up: The only ways I have encountered it is when I updated through Zune (won't apply to you since you can't connect to it atm) and when I created a backup before I updated from NoDo to 7712 to Mango 7720 RTM using a part of the downloaded file called "updatewp" just in case. Unfortunately, I have no idea how to put it back on and luckily did not have to so I can't help you there.
Did you just get the phone? If so, I highly recommend doing the Factory Reset option. The time you spend getting apps back on the phone is really negligible in comparison to the worry lol.
Maybe this link can provide some insight?
Samsung Focus won't Sync with Zune - Microsoft Answers