I kept having this problem over at strongandfit.net. I had successfully uploaded the template into another blog (my "dummy blog"), so I knew there was no problem with the xml file.
I found a way to fix it on blogger groups. Here's what you do:
1. Make sure you have some sidebar elements before trying to upload the new template (this is so that you get the 'Widgets are about to be deleted warning')
2. You should now have your new template code in place (awaiting widget deletion confirmation)
3 Press cntl+f (find function) and search for the word widget
4 Change the number 1 to 2 in all three of the following:
5. Confirm and save