A new observer of induction motor state variables is proposed in the paper. A nonlinearity of the main magnetic path is expressed as a function of a properly chosen parameter versus the position vector length. The value of the mutual inductance received n the identification algorithm is calculated exploiting the estimated values of the state variables. The coefficients appearing in the differential equations of the observer system are modified in each step of the algorithm on the basis of the calculated mutual inductance. The analysis of convergence of the identification algorithm is shown in this paper.