By Mark Corcoran and Freya Petersen, additional reporting from Reuters
Updated 11 Aug 2014
Photo: An image grab taken from a propaganda video uploaded on June 11, 2014 allegedly shows ISIS militants at an undisclosed location in Iraq's Nineveh province. (AFP: Ho/ISIS)
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"We are fighting devils, not ordinary people" an Iraqi police captain told Reuters after fleeing from the rebels who swept into Tikrit, home town of former Iraqi dictator Saddam Hussein.
After a series of stunning victories, the black battle flags of the Islamic State of Iraq and Syria (ISIS) also fly over Iraq's second city Mosul and the Sunni strongholds of Fallujah and Ramadi that were captured in January.
More than 500,000 Mosul residents have now fled the city.
Rolling in from the desert in convoys of pick-up trucks, ISIS fighters, now going by the name of the Islamic State after declaring a caliphate, have outsmarted and outfought Iraq's 1 million strong security forces, trained and equipped by the US at a cost of $US25 billion.
The Islamic State swiftly consolidated the shock value of its battlefield victories with a dark propaganda blow; releasing appalling pictures that purported to show the massacre of large numbers of Shiah government soldiers who had been captured by the militants.
So what exactly is the Islamic State?
Video: Explained: The Islamic State of Iraq and Syria (ISIS) (Scott Bevan)
The Sunni Islamist militant group or Islamic State, was known as ISIS and also as Islamic State of Iraq and the Levant (ISIL), and is considered so extreme, it has been disavowed by its original sponsor, Al Qaeda.
The jihadist group has mounted hundreds of attacks in Syria since the start of the civil war in 2011.
But the ambitions of the Islamic State stretch far beyond deposing president Bashar al-Assad. The ultimate objective is the establishment of an extremist Islamic caliphate across the region, incorporating Syria, Iraq, Jordan, Lebanon, Israel and the Palestinian Territories.
Other Islamist rebels have accused the Islamic State of being "worse than the Assad regime".
In 2013, German newspaper Der Spiegel reported that the group had kidnapped hundreds of people, including activists, politicians, Christian priests and several foreign journalists, adding that "anyone who opposes the Islamic State fighters, or who is simply considered an unbeliever, disappears".
Der Spiegel cited an engineer who fled Syria after threats he said he received from the group as saying: "We call them the Army of Masks, because their men rarely show their faces. They dress in black, with their faces covered."
Photo: An image taken from an ISIS propaganda video purports to show militants driving near the central Iraqi city of Tikrit. (AFP/ISIS)
Human rights abuses and the Islamic State's vision of creating an Islamic extremist state led to tensions with other Syrian rebel groups that soon escalated into open warfare.
The Islamic State suffered setbacks after clashes with more moderate anti-government militias, but still controls an arc of territory across the north-east of Syria, stretching from the Turkish border across to the frontier with Iraq.
The Syrian enclave, based around the northern city of Raqqa, provided the jumping off point for attacks into western Iraq.
In January 2014, the Islamic State captured the city of Fallujah and large tracts of the surrounding Anbar province.
Coming home - from Iraq to Syria and back again
This latest campaign represents a kind of homecoming for the group that can trace its origins to the anarchy of the Iraq conflict.
The Islamic State is led by a veteran Iraqi militant, Abu Bakr al-Baghdadi, who formed the Al Qaeda-affiliated Islamic State in Iraq in 2010.
As the uprising against Syria's president escalated into civil war in 2011, Baghdadi sent trusted aide Abu Mohammad al-Golani across the border to establish another Al Qaeda affiliate, the Jabhat al-Nusra Front, recruiting members from rival militant groups.
But as the popularity and influence of al-Golani's al-Nusra Front grew, Bagdhadi demanded the Syrian group merge back under his command. Al-Golani refused and the two sides clashed. Al Qaeda leader Ayman al-Zawahri sided with the Syrian faction, casting the Islamic State and Bagdhadi out of the Al Qaeda fold.
Undeterred, the Islamic State quickly expanded operations into Syria in 2012-13. Fighting not only Assad's army but other anti-government militia groups, the Islamic State soon developed a reputation for extreme brutality.
Despite presenting itself as a paragon of strict Islamic virtue, the bulk of the group's financing, experts say, comes from illegal black market activities in Iraq, including robbery, arms trafficking, kidnapping and extortion, and even drug smuggling.
In 2013, when Mosul was still nominally under the control of Iraq's government, the Islamic State was netting upwards of $8 million a month by extorting taxes from local businesses, according to the US-based Council on Foreign Relations (CFR).
It'll be interesting to see what happens in Mosul over the next weeks. If they're pushed out in the next day or two, then that has much less strategic significance than if they're able to actually hold it.
Former White House adviser Douglas Ollivant
In capturing Mosul, the Islamic State freed hundreds of prisoners, seized an arsenal Western-supplied weaponry, and also struck it rich.
The Guardian's Baghdad correspondent Martin Chulov told the ABC that Iraqi intelligence officers in the capital seized a trove of computer disks detailing the extent of the new Islamic State's wealth.
"It's about $2 billion in cash and assets according to Iraqi officials," Chulov said.
"To put that into perspective, before the events in Mosul last week, in which ISIS stormed the city, they had around $875 million in cash.
"Since then they've seized around $1 billion in weaponry from the Iraqi military, and around $500 million from banks in Mosul and Tikrit alone. And these figures are found in intelligence documents which were seized from a slain ISIS [commander], head of the military council, a very, very important figure. They've been downloaded and decrypted over the past week and have laid bare the group's accounts over two countries."
The Islamic State's finances may soon be further bolstered, as the militants now occupy territory surrounding Iraq's largest oil refinery at Baiji, which is capable of producing 300,000 barrels a day.
All factions in Iraq's long-running sectarian conflict are highly experienced in the lucrative oil smuggling trade.
But it was the Islamic State's tactical skill and speed in storming Mosul, Iraq's second city, that stunned many seasoned Iraq watchers.
Douglas Ollivant, a former US army officer and adviser on Iraq to both presidents George W Bush and Barack Obama, told the ABC that the critical question now is how long the militants can hold Mosul.
"It'll be interesting to see what happens in Mosul over the next weeks," he said.
"If they're pushed out in the next day or two, then that has much less strategic significance than if they're able to actually hold it."
Islamic State fighting force numbers unclear
Photo: ISIS militants show off their weapons in the Iraqi desert in a video released on June 11 (AFP: Ho/ISIS)
The Islamic State has a reputation as a tough, experienced guerrilla force, but the group's exact combat strength remains unclear.
Video released by the militants show convoys of fast-moving, lightly armed fighters in pickup trucks, reminiscent of the Taliban when they swept to power in Afghanistan in the mid-1990s.
"We don't know how many jihadists are coming into ISIS from outside of country," Mr Ollivant said.
"We don't know how many of the former insurgent groups have essentially joined ISIS, either formally or as their auxiliaries.
"But if they have the combat power to push into Mosul, I think they have more strength than most outside analysts thought they had."
The Islamic State victories may also be in part due to a failure of Iraqi and Western intelligence agencies to gather information on the group's capabilities and intentions.
The Guardian's Martin Chulov says the Islamic State zone of northern Syria is an intelligence "black hole".
"I think it is an organisational failure," he told the ABC.
"Let's not forget that ISIS does most of its business away from the internet - it's handwritten notes delivered by couriers. They are very hard to get on top of.
"They're a very tough nut to crack. There are large numbers of foreign jihadists in their ranks. And that, you would think, would present an opportunity in terms of infiltration, but it seems to be that those who travel the world to join them are diehard, they are battle-hardened, they are committed, and they're very, very hard to penetrate.
"I can't get too close to them. If I did, it would be lethal. I would almost certainly end up in a kidnapping and me in a dungeon for a long, long time."
Chulov estimates that there are 45 Western hostages - non-governmental organisation workers and freelance reporters - being held in the northern city of Raqqa.
"There are many hundreds, if not thousands more Syrians who are being held, and also Iraqis," he added.
The Islamic State claims to have recruited militants from across the Middle East, Europe, the UK , the US and south-east Asia, although it is impossible to confirm exactly how many are now in Iraq.
International terrorist with $10m price on his head
In October 2011 Washington declared the Islamic State supremo al-Baghdadi a leader of a terrorist organisation, offering a $10m bounty on his head.
Who is Abu Bakr al-Baghdadi?
Read more on the rising star of global jihad, the commanding leader of the Islamic StateThe group has been similarly proscribed by the United Nations Security Council and the governments of Canada and New Zealand.
In December 2013, the Australian Government declared the Islamic State to be "one of the world's deadliest and most active terrorist organisations".
The Government said the militant group "conducts daily, often indiscriminate attacks" and "targets crowds and public gatherings during holidays and religious festivals to maximize casualties and publicity".
The Islamic State has displaced its predecessor Al Qaeda in Iraq on Canberra's terrorism list to reflect "the expansion of its operating area to include both Iraq and Syria".
The December 2013 listing cited an estimated strength of around 2,500 mostly young Sunnis in Iraq, with the ranks bolstered by "a prison break at Abu Ghraib in July 2013 that freed hundreds of Islamic State members, many of whom are still at large".
The Australian Government estimated the Islamic State had another 5,000 fighters, including foreigners, in Syria, although "due to the Islamic State's Iraqi origins, a large number of its Syria-based senior operatives and leadership are Iraqi nationals".
In April 2014, the head of Australia's domestic intelligence agency ASIO confirmed it was investigating hundreds of young Australian-Lebanese men who had joined the fighting in Syria.
The ABC reported that the majority of the young fighters had family ties in the north of Lebanon, reaching across the border into Syria.
"We continue to be concerned about young Australians going overseas to fight on battlefields that don't necessarily have a lot to do with Australia," ASIO director-general David Irvine said.
"We are also concerned that young Australians go overseas and become quite severely radicalised in the extremist Al Qaeda-type doctrines."
The ABC understands as many as 200 Australians may have joined the Al Qaeda-affiliated Jabhat al-Nusra Front or its deadly rival the Islamic State.
Among those encouraging young Australians to join the conflict has been an influential Australia-based Islamic State supporter, radical preacher Musa Cerantonio.
ABC's 7.30 reported on the Melbourne-born convert to Islam who has emerged as an influential backer of the Islamic State cause, calling on young Australians to join the ranks of the formidable militant group.
