In this paper, we consider design of observers for non-linear models containing both dynamic and algebraic equations, so-called differential-algebraic equations (DAE), of index 1. The observer is formulated as a DAE that, by construction, has index 1. The main results of the paper include conditions that ensure local stability of the observer error dynamics. Design methodology is presented and illustrated using a small simulation study. (c) 2006 Elsevier Ltd. All rights reserved.