Image editing in your browser has been done before, yet I have hesitated to review these sites as they tended to be very sluggish and limited in ability. But when I discovered Sumo Paint I was presented with a new and much more positive experience.
Sumo Paint is a browser based image editor and creation tool. It is built in Flash (Flex).
Flash based apps tnd to be fairly sluggish, but Sumo Paint is fast and responsive and feels just like a desktop application.
In terms of tools, it has all the brushes, text, shape, gradient tools you expect and the much needed layers.
Sumo Paint is no Photoshop and isn't a tool I will use everyday, but it's great for those really into cloud computing.