Hi all, thanks a lot of your replies!
Ok, so as the title suggests, I took the plunge lastnight! This was also a good oportunity for me to trial out Windows 7 RC as well! Here's what I did:
1.) Went into iTunes and De-authorised my laptop. (One of the menu options in the nav at the top of iTunes).
2.) Reformatted my laptop, and installed Windows 7 RC along with all drivers etc
3.) Installed iTunes and Office 2007. Note: I didnt put a dummy contact into Outlook.
4.) Re-authorised my laptop via the same method as point 1
5.) Connected my iPhone to my laptop (trust me, I was dreading this bit).
6.) iTunes recognised the iPhone displayed it in iTunes. I left all sync options for Photos, Music and Video and Applications unticked initially. I selected the option for my Contacts to by synced to Outlook.
7.) When I clicked on Sync, it told me that my iPhone was already synced with another iTunes etc, and did I want to replace or merge data. I selected the MERGE option. iTunes then started syncing my iPhone and confirmed it had completed.
8.) By ensuring that i'd selected the merge option, iTunes synced ALL my contacts from my iPhone back to my laptop and into Outlook 2007. No contacts were deleted from my iPhone at all during this process.
Important Note: Unfortunately, although it synced all my contacts etc back to my iPhone, iTunes will erase all music and videos from the iPhone before it will allow you to add more music to it. It also deletes all Photo's from the phone that haven't been taken by the onboard camera (Camera Roll) so make sure any photo's are backed up prior to doing this.
Hopefully this will be helpful for someone else in the future. Let me know your thoughts