The report is little more than a rider in a larger piece about a new entry in the MacBook Air lineup, but it states that the iWatch does indeed exist, but that the device is still in the prototype phase, which means it will not be announced or released any time soon. And, it may even mean that the device will not be released at all. Being in the prototype phase is the ultimate question mark when it comes to Apple. It could mean that Apple is testing various designs for a device that is on the path to mass production, or it could mean that Apple is testing the viability of a product that may not see release.
Given the reports on what Apple is doing with iOS 8, it seems likely that even if the iWatch doesn't become reality just yet, Apple will at least be releasing a fitness tracking band accessory. But, it also seems inevitable that Apple will be playing catch-up to Android Wear, Pebble, Samsung Gear and the rest that are already filling up the smartwatch space.