When you try to connect Windows Phone 7 to your computer by using the Zune software, you receive this error message on your computer:CONNECTION ERROR
We can’t create a connection from your phone to the Internet. You can still sync content between your computer and your phone.
Closed Zune software and disconnected phone
Changed the “Zune Network Sharing Service” to run under Local System account
Change the “Zune Windows Mobile Connectivity Service” to run under Local System account.(this one wouldn’t start at all with some obscure error)
Started both services
Hard reset on the phone
Connected Phone after it started up
See When you connect Windows Phone 7 to your computer you receive a Connection Error at http://support.microsoft.com/kb/2468384 for more Solutions.