According to Merriam-Webster Online, the one-word underway is an adjective only. Their example: the odd-sounding the "underway replenishment of fuel." It’s two words when used as an adverb. Their example: “preparations were under way.”
Webster’s New World College Dictionary lists only the one-word version and lists it only as an adjective. So it seems they're saying that underway can’t be used as an adverb and under way doesn’t exist.
Does this mean that Webster’s New World and Merriam-Webster disagree on whether it’s an adjective or adverb in “preparations were underway”?
Remember that, among their other jobs, adverbs answer the questions “when?” “where?” and “how?” So in “Finals were yesterday,” the word “yesterday” is an adverb. Merriam-Webster seems to think that the setup “preparations were …” calls for an adverb. Webster’s New World may be suggesting that it’s really an adjective.
Remember that adjectives can also go after (be complements of) the words they modify. That is, “tall” is an adjective in “the tall man” and in “the man is tall.” So is that what Webster’s New World is thinking?
We may never know.
Here’s some good news: American Heritage allows both forms – under way and underway – as both adjective and adverb. It prefers the two-word form, by the way. But, either way, if you now find yourself more confused than you were before you started reading (as I know I am), at least know that American Heritage will back you up no matter which form you use or how you use it.