Considering that it hasn't been shy about moving in and taking over areas that were covered by third-party developers and apps before, it wouldn't be much of a surprise for Twitter to be launching a photo app.
Adding to this the hype around photo-sharing apps and Twitter's need to find new revenue sources, and it's starting to look like a no-brainer. Since it's been confirmed by several sources, it is very likely that Twitter will be launching the new photo service this week at the D9 conference.
There aren't that many details on how the service will work, though judging by what is already available it shouldn't be something too complicated. Users will be able to attach an image to their tweets which will then leave at a separate URL.
Viewing the tweet on Twitter.com will display the image inline and other clients will probably follow with support. Twitter may also use a short URL to enable users to share the photo not only on the site, but on other places as well.
Apart from creating a more complete service, something that Twitter has started to do now that its infrastructure is up to spec, adding photo-sharing features could prove a valuable revenue source.
The obvious move is adding ads next to the images, which is what third-party sites already do. While Twitter shied away from advertising at first, it ended up doing exactly that to generate revenue, albeit in formats specific to Twitter, like promoted tweets and trends.