Considered the possible assembly malfunction in control loop, this paper researches the sliding mode observer(SMO) design for a linearized physical system with environmental disturbances and sensor faults in some constrained conditions on system structure, to set up the fault detection and isolation(FDI) scheme for system in the loop. On one hand, by utilizing the features of fault distribution, the coefficients of fault and disturbance in unobserved subsystem are canceled by state transform under the presumed conditions. Then SMO served in FDI for observable subsystem is constructed, where the convergence of observed error is verified by analysis on Lyapunov functions. On the other hand, for the general situation when fault and disturbance are distributed randomly, the coefficients of fault corresponding to unobserved states are canceled by imposing some similarity transforms on system matrix, such that a reconfigured SMO is designed to counteract and detect the fault in observable subsystem. Furthermore, using inequality transform, the convergence of observed error is shown to be bounded with oscillation, which is proved for the existence of disturbance. Finally, FDI scheme is applied and tested in a fixed-wing airplane system to validate the stability of SMO.