It looks like Microsoft won't be challenging Photoshop (or InDesign) anymore, at least temporarily. Originally with plans for expansion on the “Expression Graphic Designer” tool, Microsoft has seen that it just isn't quite fit to have it released all on its own.

In an interview with ZDNet Australia, Smith explained that Microsoft was taking so long to bring Graphic Designer to market because the company had put "a lot" of the development work for the application "on pause" until sibling products and Vista could be finalized.
Vista development has become quite key for MS, especially with the now impending December release date only 9 months away. EGC isn't being abandoned, and may find roles in conglomerate software packages such as web design suites.