I've been on 1.2 since rc1. Upgrading was a bit of a pain, mostly due to the issues around making sure the environment variables were set correctly and such. A couple libraries broke, a few plugins had to be updated. Most of the work beyond that was around deprecations, and changing how a few things worked.
My general advice for updating to 1.2 is:
0. You're using svn, and have a reasonably good set of tests, right?
1. Do the gem update. Do not do a gem cleanup.
2. "rake rails:update" or "rails your_app_directory", then svn diff to see what changed and where you need to manually pull things in. If you're on OSX it helps to set up svn to use bbedit/textwrangler's diff tool to do this.
3. run the test suite and dink around in the app to make sure it works. If it doesn't, figure out if it's a relatively quick fix. If it is, fix it and move on. If it isn't, roll back to the checked in state, then wait for the smoke to clear.