I like the new tweaks that are done in 1.2. One small comment, change the star to something else thats more related to watched threads (one/two eyes) instead of a star that could be interrupt as something else.
You can either edit the sprite and replace the spectacles icon or add something to EXTRA.css to change the image for the .discussionListItem .iconKey .watched selector.
I agree it's not that great - that's about the limit of my abilities though
There's actually a wall and then a shadow so that's why it looks a bit odd.