I just tried to Upgrade from 1.2 RC2 to 1.2. I uploaded all files, and then a message shows up "There are at least 1 file(s) that do not appear to have the expected contents." ... So I got the full package and uploaded everything once again. Same mistake. I didn't know what to do, so I tried to "Begin Upgrade" even if the error was still there. First I got that Error "Line 26: Template syntax error." and afterwards that one "ad_thread_list_below_stickies: Line 1: Template syntax error." (caused by an add-on?).
Keep a very close eye on your FTP console. It should pretty much list the transfer status of all files. See if you can tell which file it is failing on. It might be a permissions thing that's blocking the file from being uploaded.
.htaccess and config.php was not overwritten for me. Avatars are still existing so far. That would be OK for me. The installation is pretty new. But I still do not know, how to get through the upgrade now. Same thing as before. :|