I remember the original direction of TF2 as well. You've got to remember, that back when development first started on this game in 1998 most multiplayer FPS games were simply deathmatch games. The concept of a realistic, military based FPS was really quite new. Team Fortress and Starsiege:Tribes are the only two team based multiplayer games that I can recall being popular at the time. Neither of these were realistic in nature.
Eventually, as we all know, mods such as CS and DOD came out and suddenly more realistic team based multilayer games weren't new anymore.
Why did the development of TF2 take so long? Who knows. Why did they change the graphical and game play style? If I had to guess, It would be in order to make the game stand out from the crowd. TF2 is still a fairly unique game when it comes to the style of graphics and the game play.
And I for one am glad for the change.