As far as contacts and anything that's synchronized through google, you're not going to lose them.
As far as things you've installed on the phone, including but not limited to: Installed apps, saved text messages, bookmarks (if not sync'd), you're going to lose all those.
It's essentially upgrading the operating system in your phone, like if you upgrade the OS in your computer (Windows XP --> Windows 7). You're going to lose everything because it has to wipe the hard drive, or in this case, the internal storage space used to store the OS and your apps.
