Firstly, thanks everyone for the majority of posts here being useful and on topic 
I'm going to try to cover the major issues/questions people have here
Why not go back to beta 2/r718 and release that as version 1.3
Well, beta 2 is a long way behind, the the problem with r718 is not only does it not have the final markup and many markup issues currently. It seems ridiculous to delay all this time then release a poor product (and I'm not talking about perfection here, just that it should be of reasonable quality)
Why not release 1.3 ASAP then add a template system etc to 2.0
The problem with this is, although the extension system means upgrading from 1.3.1 to 1.3.2 would be easy, upgrading from 1.3 to 2.0 will not be as simple. With a template system, all the extensions for 1.3 will need rewritten, and the markup will probably be different enough to break many styles. We want the next major release to be complete enough to have a number of years of life before it needs replacing otherwise we're effectively destroying all the work done by the community for 1.3
Won't developing 2 branches (1.2 and 2.0) slow them both down
This is less of a problem than you might think, the development we are proposing for 1.2 is simply backporting features from 1.3 to 1.2, the bulk of the work is already done, and crucially, we're not looking to redo the markup. We currently have 3 php devs and 1 markup dev, so obviously we can get the coding done faster. Also as elbekko said, we could have 2 separate teams, and new php devs are reasonably easy to find.
Why bother with the 1.2 branch when the 1.3 branch replaces it
I am not sure this is true, I imagine many people will continue to use 1.2 for a long time, and there may also be people who still want a simple forum with code they can easily hack, rather than an extendible templated forum that makes for good extension and style writing, but is harder to understand the code.
I thought the only reason 1.3 wasn't out was because of the markup/Why do you keep adding features to 1.3 and not just release it
It is true we have been waiting for the markup, however the problem is the extension system in 1.3 has grown much bigger than it was intended. It was originally planned to allow a few features such as private messaging and polls to be added, and not for every possible extension to be coded with. This has led to a rather messy situation with the markup and hooks, and will mean extensions have to be written in a less clean way to do what they want, which will lead to issues with conflicting extensions etc. We have already gone part of the way to a template system by storing information in arrays then having a hook before it is output, but this isn't completely useful.
It is not that we suddenly want to add these features, we have been not adding them in order to reduce the delay before releasing 1.3, however I don't think this is the best strategy in the long run.
I hope that clarifies some things, and also, please don't bother with "I vote for X" posts, this isn't a vote, its a discussion, we don't want your opinion as much as your thoughts on the matter.
The way I see it now, there are at least three ideas about this floating around:
