I had one hell of a time updating the Windows Phone 7 LG Optima 7 from PDC 2011.
It seems like many people have had some form of this problem: When the zune software reboots the phone before the update, the phone gets stuck with the “connect your phone” picture.
Some people seem to get errors of some kind or a timeout, but on my machine I never got any error. It just didn’t work. I went through all of the troubleshooters I could find but just couldn’t get it to work.
The solution turned out to be to perform the update on a different computer. I did this with the February and March updates.
Note that I tried to update on the original computer after the February update, hoping the problem was gone, but no luck. I had to do both updates on the second machine. Who knows, maybe when the next update comes it will work on the original machine (or maybe Microsoft will fix this with Windows Update or a Zune software update).