This is a polite euphemism; in most cases it translates roughly to "I am a vegetable. I'm doing absolutely nothing, and I have absolutely no intention of doing anything, ever." When you're really lucky, it means something more like this: "I am putting forth the minimum amount of effort required to placate you so you don't beat my worthless lazy head against the floor."
When you hear these words, friends, it's a clear sign that you're herding cats. You will never get anything satisfactory out of somebody who says "I'm working on it". If it's sense two ("minimum effort to placate"), you may eventually get some mediocre results if you invest an unreasonable amount of time in prodding, kicking, and micromanaging the vegetable in question. Sense one is utterly hopeless. It's like kicking dead whales down the beach and nailing jelly to a tree, all rolled into one.
Usually, "I'm-working-on-it"-istas are convinced that the whole thing is really just a gratuitous power struggle, which they can "win" by "not letting you push them around". They think it's all about the interaction between you and them. They never quite realize that they're just random semi-animate obstacles that you're trying to kick out of the way so you can get on with something interesting. You are trying to get something accomplished, and the interaction between you and them is nothing more than an unpleasant necessity that you'd gladly avoid. They don't understand that. It's totally beyond them.
All of this has a lot to do with that point in your life when you start being responsible for others in addition to being responsible to others.