The strange island state with moral values (7)
I believe the answer is:
ethical
'with moral values' is the definition.
(with morals or ethics)
'the strange island state' is the wordplay.
'strange' indicates anagramming the letters.
'island' becomes 'i' (geographical abbreviation).
'state' becomes 'cal' (short for California).
'the' anagrammed gives 'eth'.
'eth'+'i'+'cal'='ETHICAL'
(Other definitions for ethical that I've seen before include "Morally right" , "Moral, honest" , "In accordance with approved moral standards" , "Moral, principled" , "Principled (behaviour)" .)