If you are building website in Magento, you may have noticed that there are two columns insales_flat_order table which are confusing. These are state and status. You might think what is the difference between these two, both having same meaning.
Well, this is not the case. They both are different. State is used by magento to tell if the order is new, processing, complete, holded, closed, canceled, etc.; while Statuses are the one that YOU would be defining at the backend in System -> Order Statuses. Magento displays order STATUSES and not STATES in the backend order detail page to let you know which status is assigned as per your mapping. Remember, multiple statuses can be mapped with one state, while vice versa is not possible.
Consider an example, your customer places an order as Cash on Delivery, you will need something like COD_Pending as the order status so that you know it is not yet paid. Magento will have state new for this, which makes you unpredictable of what kind of transaction is this, COD or Prepaid. The STATUS can be anything, as you define, for your understanding; while STATE is something which Magento needs to understand, internally.
In short, Magento uses order state internally for processing order, whereas order status are used by store owners to understand the exact order flow where one state can be assigned to multiple statuses.
To understand this in detail, have a look at this
Hope it helps!