Hi!
I had got the same problem.

TO FIX:
Go menu: System / Administration / Software Sources.

I checked in the first tab:
Canonical-supported open....
Community-maintained open...
Propietary driver....
Sofware restricted by copyright....

I checked in the second tab:
Third-party....

I unchecked in the first tab:
Source code.....
Cdrom with Ubuntu 7.10.....

It works now perfect :D

Marquinos.

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