This paper investigates a Luenberger flux observer with speed adaptation for a direct field oriented controlof an induction motor. An impoved method of speed estimation that operates on the principle of speed adaptative flux and current observer has been proposed. An observer is basacally an estimator that uses a plant model and feedback loop with measured stator voltage and current. Simulation results show that the proposed direct field oriented control with the proposed observer provides good performance dynamic characteristics. The induction motor is fed by an indirect power electronics converter. This indirect convector is controlled by sliding mode technique that enables minimization of harmonics introduced by the line converter, as well as the control of the power factor and DC-link voltage. The robustness of the overall system is studied using simulation for differnet operating modes and varied parameters.