When upgrading to 1.3.5 using Fantastico, I found that everything appears to work using the normal template override system, BUT there's a subtle problem - new users can't register. I missed this in testing, and no users could buy anything for several days. :-(

I also discovered the hard way that the template override system doesn't work in the admin folders. :-(

I had to do the full upgrade procedure - back everything up, do a clean install, download the original version my templates were based on, run a diff, manually merge all the changes, tweak the new templates to restore the original appearance, etc.

It sounds easy but it took me ALL DAY. And my changes were fairly minimal - just fixing metric units, charsets and date formats for non-American users and removing the Zen Cart logo. I do NOT recommend upgrading until you have a free day to spend on it.