We consider the problem of constructing adaptive observers for servo systems with friction. We show that if the friction force is modeled using currently popular dynamic friction models, currently available methods for constructing adaptive observers can not be applied. We suggest modifications for one such friction model: the LuGre friction model and point to several methods of constructing adaptive observers that can be applied to the modified system. Using one such method, we construct an adaptive observer to identify parameters of the model of an experimental setup. The results of the identification exercise are found to be encouraging.