The word state comes from the phrase "look at the state of it" and meaning just that. One fine day the phrase "state of it!" and "Oh my god!" were accidentally merged to form "Oh my state" which is still used but has been shortened to form the word "state". A state is either a retarded person, or an unfortunate or stupid situation.
Boy: "Look, that guy just fell over"
Girl: "Oh, state"
"Omg, your such a fucking state"
"Lol, omg state of it!!!"