It's pretty much incorrect. When you have 3 flip-flops, you have 3 memory elements each capable of being in a 0 or 1 state. The state of this system refers to the collective state of the individual flip-flops. With 3 flip-flops, you have 23 possible system states. The 3-bit value you are showing in the center of the circles represents the state of the flip-flops for that particular system state. For example, when the state of the first flip-flop (going from left to right) is a 1 (internally, not referring to Q or Q') and the second and third are both 0, you can say that the state of the system is [D1, D2, D3] = [1,0,0] or even "4" if you treat [1,0,0] like 1002.
[Edit: I see you are treating the clock like an input to the system. Technically, it is an input but it is a special input used for synchronizing the inputs and allowing the system to advance from state to state. In this case, your "input" is really the output of D3 fed back to D1. I say "input" with quotations because it is really an internal signal, not coming from outside the system.]