In this paper, a robust output feedback control strategy is proposed for a nonlinear teleoperation system which can deal with stability as well as transparency despite the variable time‐delay and uncertain dynamics. The proposed approach is composed of two steps. First, local Lyapunov based adaptive controllers are applied to both master and slave sides in order to suppress the nonlinearities in the system dynamics. Afterwards, a new observer‐based controller scheme is proposed to achieve stability and performance (transparency) of the teleoperation system. Using the Lyapunov techniques, stability and performance objectives are cast as some linear matrix inequality (LMI) feasibility conditions. To evaluate the performance of the proposed controller, a set of simulations and experiments are performed. Through simulation results, it is demonstrated that the proposed approach significantly outperforms the existing methodologies reported in the literature.