The teams ranks number in the hundreds, bolstered by talent hired away from companies working on altered-reality technology and buying startups in the fields, according to the Times.
Apple also has a trove of patents related to technology that could be put to work in reality-altering gear.
California-based Apple has not commented on reports it is exploring virtual reality, but chief executive Tim Cook voiced interest while answering a question during a quarterly earnings call this week.
"I don't think it's a niche," Cook said of virtual reality in response to a question from an analyst.
"I think it is really cool and has some interesting applications."
Apple has been building headset prototypes for months, according to the Times.
Altered realities abounded at the Consumer Electronics Show gadget-fest in Las Vegas early this month, touching everything from sex and sports to sales and space exploration.
Virtual reality (VR) headsets immersed people in fictional worlds, while augmented reality (AR) eyewear overlaid digital data on the scenes around them.
Facebook-owned Oculus is taking pre-orders for its eagerly-anticipated Rift VR headsets at a price of $599. Rift was slated to begin shipping in March.
While video game players have been natural early targets for virtual reality, the technology is being put to use for education, medicine, sports, pornography and more.
Microsoft is expected to release its HoloLens augmented reality visors this year.
Unlike virtual reality which immerses people in fictional worlds, augmented reality makes information appear to float in the real world.
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