Since there's no "right" answer for version numbers, it's hard to answer questions like this. If the developers feel that 2.0 is a good number for their new release, then who are we to argue with them? (And why should we care in the first place about what number appears in an about box somewhere..?)

It's been eight years since Audacity 1.2 was released (and at least six years since 1.3 development began), and the code has seen pretty major changes in that time even though they happened gradually and not all are obvious from looking at the UI. I think it's fair to call 2.0 a major upgrade from 1.0 and 1.2.

Or to look at it another way: If you haven't changed the major version number after ten years of development, then you'll probably never change it. And if you're never going to change that number, it's redundant and you might as well drop it. (This is roughly what the Linux kernel did when it switched from 2.6.x.y to 3.x.y after fifteen years of 2.x releases.)