Are you syncing your phone with iTumes when you get this prompt? Are you sure the merge or replace promt wasn't for contacts and/or calendars?
If you are syncing contacts or calendars with a supported program on your computer such as Outlook, the first time you sync you will get a merge or replace prompt. If you choose replace, the Outlook contacts (for example) will replace the contacts on your phone. If you choose merge, the contacts on your phone will be merged with the ones in Outlook and the merged list will be synced to your phone.