This paper provides a procedure for designing a sliding mode observer for a nonlinear system in the presence of Gaussian input disturbances and sensor noises. The paper first proposes a novel candidate for Lyapunov stability, termed a Time-averaged Lyapunov (TAL) function. The TAL averages the Lyapunov analysis over a small finite time interval, allowing for intuitive analysis of noises and disturbance. The paper then provides the necessary and sufficient condition for the design of the sliding observer gainsusing the TAL in the form of Linear Matrix Inequality (LMI). The LMIs can then be explicitly solved offline using commercial LMI solvers. The paper compares the LMIs for the two observer designs to demonstrate the design of the sliding mode observer using TAL can greatly enhance the scope of observer design for nonlinear systems.