I think the best reason given was the fact that the more complex the graphics, the slower the updates. I -love- the content and depth Toady is putting into this game, and it's clear that managing the simple tile-based 2D world as it is already is a monstrous undertaking with a lot of room for things to go wrong. With only one man doing the entire job, the last thing DF needs is more hurdles to updates and completion.
Personally, I've grown rather fond of the old-school graphics, both the pure ASCII and the 2D sprite packs. I like that it allows me to use my imagination to see the game, and that we as a community can write some incredible stories to fill in the gaps where the crude animations end. I'd be content with a slightly more sophisticated graphic system, sort of like what we see in stonesense: workshops look like workshops, grass grows on the ground, etc. It doesn't even need to be isometric (though that's a cool feature for just viewing a fort in 3D, I prefer the top-down view for actually playing the game). If this game wound up looking half as good as an old school SNES RPG like the old Final Fantasy games, I'd be overjoyed beyond belief. I don't think I'd want it to go any further, to be honest.
We're all probably blue-skying anyway; without a serious change of attitude on this being a solo project, the game isn't changing appearance any time soon