So, “en” is an adverbial pronoun which is used to replace “de + nom”. But what noun does it replace in the mentioned phrase?
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En, y and the reflexive pronouns are often used in a way which is not analyzable to modify the meaning of verbs (phrasal verbs in English are doing the same thing with prepositions). If the meaning of a sentence using these pronoun isn't clear it can be such use.
It is the case with être. There are several meanings associated with en être, in some of them en is still analyzable, it isn't the case here when en être means being at some step in an evolution or progression.
If it helps, you can think of en as standing for the thing that was in progress.
However, as Un francophone points out, this is pretty much a fixed phrase. I couldn't tell if the grammatical construction really originates in this.
The good news is, once you know it, French actually makes it clearer than the more versatile English where were we ? ;)
"On en était où" est familier et peu correct.
Il faudrait dire "Où en étions-nous".
Quant à "où en était-on" c'est tellement laid phonétiquement qu'il faut le bannir, sans parler du phonème grotesque de la fin de la locution.