It is actually a phrase borrowed from the U.S. patent system. One of the requirements for a valid patent is that it must "advance the state of the art;" that is, it needs to be something new and important. The "state of the art" means everything that is already being known and practiced.
So, "the state of the art" means the best, most modern, most up-to-date technology. As an adjective, it's hyphenated, state-of-the-art.
Incandescent car headlights are outdated technology. HID headlights are modern technology. LED headlights are state-of-the-art.