This article is concerned with observer-based fault estimation and adaptive fault tolerant control for a class of continuous-time dynamical systems. First, a second-order sliding mode observer is proposed, which is capable to eliminate chattering effects for fault estimation caused by the conventional sliding mode observer. Second, in order to avoid the cumbersome stability proving process by the geometric method, a Lyapunov function is adopted to prove the observer error dynamical system. Third, based on the estimated fault information by the proposed observer, an adaptive fault tolerant control law is developed to guarantee the stability of the faulty system. Finally, the proposed method is applied to the Boeing 747-100/200 flight control system, and the simulation results verify the effectiveness of the proposed scheme.