States are what Magento uses internally to understand the position of the order. States are defined in XML in the global/sales/states node:
<states>
<new translate="label">
<label>New</label>
<statuses>
<pending default="1"/>
</statuses>
<visible_on_front>1</visible_on_front>
</new>
<pending_payment translate="label">
<label>Pending Payment</label>
<statuses>
<pending_payment default="1"/>
</statuses>
</pending_payment>
<processing translate="label">
<label>Processing</label>
<statuses>
<processing default="1"/>
</statuses>
<visible_on_front>1</visible_on_front>
</processing>
<complete translate="label">
<label>Complete</label>
<statuses>
<complete default="1"/>
</statuses>
<visible_on_front>1</visible_on_front>
</complete>
<closed translate="label">
<label>Closed</label>
<statuses>
<closed default="1"/>
</statuses>
<visible_on_front>1</visible_on_front>
</closed>
<canceled translate="label">
<label>Canceled</label>
<statuses>
<canceled default="1"/>
</statuses>
<visible_on_front>1</visible_on_front>
</canceled>
<holded translate="label">
<label>On Hold</label>
<statuses>
<holded default="1"/>
</statuses>
<visible_on_front>1</visible_on_front>
</holded>
<payment_review translate="label">
<label>Payment Review</label>
<statuses>
<payment_review default="1"/>
<fraud/>
</statuses>
<visible_on_front>1</visible_on_front>
</payment_review>
</states>
Status
A status is used to understand in more granularity for the store owner (or custom application) what position the order is in.
Statuses are created in the admin area (System > Order Statuses). Each created status can be assigned a state; ** state is a child of status **