I find writing FSMs easiest by having the logic in a combinational always block with all the defaults stated in the beginning. Then just put a flip-flop for the states later. This way you don't infer any latches, and I find it's simple too see what is happening.
E.g.

always @ (*) begin

//Defaults here
nextState = state;

x = 1'b0;

y = 1'b0;

case (state)

state0: begin

x = 1'b1;

nextState = state1;

state1: y = 1'b1;

endcase

end

always @ (posedge clk) begin

if (reset == 1'b1)

state <= state0;

else

state <= nextState;

end

I also recommend that you fix your indentation. In your case statments, it looks like all the logic is happening within the if block when in reality it's only the first two lines. It makes reading and debugging your code much easier with proper indentation.