I have been tinkering a lot lately with the concept of writing DHTML-based desktop applications running in a custom web browser. The custom browser would be made to look like the host shell of a standard Windows application with normal menus and toolbars. One of the pieces missing from DHTML applications in the past has been the lack of a graphics rendering system. Scalable Vector Graphics (SVG) fills this hole nicely. In fact, SVG will create graphics that rival any graphics library, desktop or otherwise. If you have not played with SVG, you owe it to yourself to have a look.
Besides static graphic rendering, SVG also builds on all the dynamic concepts in DHTML. SVG elements can have attached event handlers for mouse and keyboard events, among others. Javascript can be used to handle any of the events. SVG elements can also be animated very easily.
Currently, SVG is supported in MSHTML/WebBrowser via ActiveX viewers from Adobe and Corel. Mozilla/Firefox browsers will have native support sometime in 2005.
I think it is also worth mentioning the MSHTML/WebBrowser does support a native graphic markup language called Vector Markup Language (VML), which predates SVG and is very similar in design. If you want to natively support graphics (No ActiveX), you should consider VML.