Precise motion control remains one of the most important problems in modern technology. It is especially difficult in the case of two-mass systems with flexible coupling if only the motor position and velocity are measured. We propose a new methodology of control system design in this situation. The concept is founded on a robust observer design, based on a linear matrix inequality (LMI) solution. The observer cooperates with the original nonlinear controller. The presented approach allows us to solve the position tracking problem for a two-mass drive, with unknown parameters, in the presence of disturbances (for instance, nonlinear friction-like torques) acting on both ends of the flexible shaft. Under this set of assumptions, the problem was never solved previously. The closed-loop system stability is investigated, and the uniform ultimate boundedness of state estimation errors and tracking errors is proven using Lyapunov techniques. Numerical properties of the design procedure and characteristic features of the observer, controller, and closed-loop system are demonstrated by several examples.