Many applications of the hydrostatic transmissions require high dynamic response and good damping. This is especially true for hydromotor drives. Mordern drives, such as those for passenger cars cannot be successfully developed without rigorous movement control of all four wheels. Due to the poor damping of the electrohydraulic servos for the pumps and motors, it is very laborious and doubtful to optimize such a system if restricted to conventional speed control. Instead, a Luenberger observer has been devised to estimate the state variables as feedback parameters for optimal dynamic control. Modelling of the system and the performance of classical vs. state variable control of hydrostatic drives are discussed. Results of simulation are shown.