He said that since the Prophet died in 632 CE, some Muslims took the path of strengthening the state of Islam while others embarked on the establishment of the Islamic State.
He defines the phrase "state of Islam" as
the condition of a Muslim in how he or she imbibes the values of Islam to govern personal life and uses faith as a moral compass
In contrast, he defines the "Islamic State" as
a political entity of a state, caliphate, sultanate, kingdom or country that uses Islam as a tool to govern society and control its citizenry
This is interesting because in Malaysia we see that Umno is not using Islam for the establishment of an Islamic State nor a state of Islam (Umno is too closely associated with the perception of corruption and scandals like the "cow-gate" and "submarine-gate" to have any traction or credibility here even if its tries to)
Instead, it seems that Umno is trying to use Islam to scare the Malays into supporting them by claiming that Umno is the only true champion of bangsa, agama dan raja (the Malay race, religion and king) and that without Umno the position of Islam will be threatened.
Pas, on the other hand, obviously is keen for the establishment of an Islamic State and ostensibly a state of Islam too.
However, Tarek Fatah also noted that
At times, these two objectives overlay each other, but most often, they clash. Islamists obsessed with the establishment of the Islamic State have ridden roughshod over Quranic principles and the Prophet's message of equality. However Muslims who have striven to achieve a state of Islam have invariably stepped away from using Islam to chase political power, opting instead for intellectual and pious pursuits. These are the people responsible for what is glorious about our medieval heritage and Islam's contribution to human civilisation