According to both the New York Times Bits blogs and Monday's Wall Street Journal, the company is experimenting with designs for watch-like devices that could perform some smartphone functions. The WSJ story, which is attributed to "people briefed on the effort," does not provide many details on what Apple is actually planning, but it does say that it has discussed potential devices with manufacturing partner Hon Hai.
The WSJ notes that Hon Hai has been working on "a spate of technologies that could be used in wearable devices," but that the capabilities Apple is considering "remain unclear."
The Times piece says Apple is experimenting with "wristwatch-like devices made of curved glass," citing "people familiar with the company’s explorations."