In Islam there is no division between Heaven and Earth. If you follow the teachings of Islam, you will be able to achieve Heaven on Earth. That is why followers of Islam see government as being either secondary to their religion or being one and the same as their religion.
The prohibition on portraying the prophet arises from the strict ban on idolatry in Islam. The prophet Mohammed is not God and should never be worshiped. Worship of the prophet over God is seen as heresy and diminishing God. In the early days of Islam, there was a lot of idolatry of the prophet, much as Christian's worship Jesus. But this was strictly forbidden and the fear in Islam is that worshipping the prophet could ultimately interfere with the possibility of finding Heaven on Earth.
This is ultimately the problem with Islam. It calls on followers to go beyond their own communities to enforce their beliefs against non-believers in order to be rewarded with Heaven on Earth. And this is also why the reaction is so violent in countries with large Muslim populations. They see westerners consciously interfering with their quest to find Heaven just for mere amusement.
Of course, this is all a bunch of crap and no one in the West should yield an inch to this religious fanaticism. But it is a much more accurate picture of the conflict than you get in the news.