There is a mistake in the FSM diagram for state E. Both transitions out of state E show the same input/output values, but they should be different.
Assuming the customary notation of input/output, both transitions show 0/0. One of the transitions should show input=1, like 1/0.
There is a similar mistake for state B. Both transitions out of the state show the same value: 1/0.
It has a total of 7 states (so I need 3 FFs right?)
Yes, if you have 7 states, you can encode those states with 3 FFs.