Hi I have the same problem:

When upgrading from web it will hang at 'reading cache'.

When upgrading from the alternate cd it will hang at 'checking package
manager'.

I tried changing source servers but that did not help.

This same issue has also been reported here:
https://bugs.launchpad.net/ubuntu/+source/update-manager/+bug/153984

-- 
Upgrade to 7.10 hangs at "Modifying the software channels/Checking package 
manager"
https://bugs.launchpad.net/bugs/152296
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