As for the XOR, it should be drawn as a 2-input XOR gate, with its two inputs as Q1 and Q3, and its output going to D2. That's the equation in the drawing, anyway.
As for the initial state of the state machine, that is up to you or should be specified in the problem statement. The flops aren't shown with a reset input, but they really should be. Any real-world state machine has to have a reset state to start things off. Since there are 3 FFs, this state machine has 8 potential states. Usually you would start off the state machine in the reset state Q[3:1] = 0b000, and at each clock tick, the machine would transition to the next state. If your FFs started off at 0b000, then given the equations, the next state would be 0b010. Do you see why?
The best thing to do is to draw the state diagram for this machine, and trace out the path that it will take, assuming it starts in the reset state. It may be that all 8 states are not visited, given the starting state of 0b000. The timing diagram will just show the D and Q values of the circuit, as it transitions from state to state.
BTW, in the real world when you design a state machine, you will also be careful to make sure that any unused states (those that you don't get to through a natural progression from the reset state) have their own unconditional transitions back to some legal state, usually the reset state.