In this paper, the problem of observer-based adaptive sliding mode control is discussed for nonlinear systems with sensor and actuator faults. The time-varying actuator degradation factor and external disturbance are considered in the system simultaneously. In this study, the original system is described as a new normal system by combining the state vector, sensor faults and external disturbance into a new state vector. For the augmented system, a new sliding mode observer is designed, where a discontinuous term is introduced such that the effects of sensor and actuator faults and external disturbance will be eliminated. In addition, based on a tricky design of the observer, the time-varying actuator degradation factor term is developed in the error system. On the basis of the state estimation, an integral-type adaptive fuzzy sliding mode controller is constructed to ensure the stability of the closed-loop system. Finally, the effectiveness of the proposed control methods can be illustrated with a numerical example.