I identified two states, the system is either receiving a character or waiting for one to start. When you turn the power on the system will set itself up and then enter the "waiting for a character to arrive" state. When the user enters a dot or a dash the system will move into the "receiving a racter" state. It will stay in this state, receiving and recording dots and dashes, until it detects the end of the character. At this point it will use the information it has received to decide which character was sent and then display this on the LCD. Having done that it will return to waiting for the next message.

On the right you can see a "top level" state diagram for my Morse Code system The lines show how the states change from one to another. Something which causes a change in state is called an event.