Bush is trying to make a clear distinction between 1) the religion of Islam and 2) Islamic states who sponsor terrorism and Islamic terrorist orgainizations
The distinction is more correctly 1) lukewarm Moslems, and 2) serious Moslems.
Bush's diplomacy is an attempt to convince the lukewarm, to STAY lukewarm, by trying to prevent the perception that we are at war with Islam... even though, that is exactly the truth.
As it turns out, the serious Muslims tend to be in leadership positions in Islamic nations as well as in terrorist organizations. That leaves a lot of people who don't know what they believe who are captive in the Islamic nations with no choice in what they believe. They either believe Mohammed or die. What do you think freedom of religion would do in those nations? That could happen in Iraq.