The January 2011 update of the Windows Phone 7 Developer Tools dropped recently, and there have been a number of reports of installation issues. The most significant issue seems to be the WPDT Update hanging at the very end—“Time Remaining: 0 Seconds”. If this happens, kill the installer application, reboot and reinstall the WPDT Update (the eboot may not be necessary, but it can’t hurt). The second installation should complete quickly, and then you can install the VS 2010 update.
Thanks to John Hidey for the tip!