It offends Muslims
Further information: Wikipedia:What Wikipedia is not#Wikipedia is not censored, Wikipedia:Content disclaimer
Wikipedia recognizes that there are cultural traditions among some Muslim groups that prohibit depictions of Muhammad and other prophets and that some Muslims are offended when those traditions are violated. However, the prohibitions are not universal among Muslim communities, particularly with the Shi'a. Since Wikipedia is an encyclopedia with the goal of representing all topics from a neutral point of view, Wikipedia is not censored for the benefit of any particular group. Wikipedia will not remove content or images because people find them objectionable or offensive so long as the content or images are relevant to the article and does not violate any of the Wikipedia's existing policies, nor the law of the U.S. state of Florida, where Wikipedia's servers are hosted. (see also Wikipedia:Content disclaimer)
The traditional reason given for the Islamic prohibitions on images of prophets is to prevent the images from becoming objects of worship as a form of idolatry, where the image becomes more important than the subject it represents. However, Wikipedia uses the images of Muhammad as examples of how Muhammad has been depicted by various Islamic sects through history and not in a religious context. Therefore, there are no concerns that the presence of the images on the articles will result in the practice of idolatry among Muslims.
Please note that if you are offended by the images (and you have an account), you can change your personal settings so that you don't have to see them, without affecting other users. To do this, create a page at User:YourUsername/monobook.css and add the following line:
body.page-Muhammad img {display: none;}
This will permanently hide the images on the article for you as long as you are logged in.
[edit] The images are false
So are images used in articles for Christopher Columbus, William Shakespeare and Jesus. As there are no accurate images (e.g. photographs), it is best to use what we have. Longstanding tradition on Wikipedia favors any images even representing part of a tradition over none at all.