In this paper, we propose a reduced-order observer, for state estimation in a class of state-delayed dynamical systems driven by known as well as unknown inputs. Conditions For existence of the proposed observer, plus the stability and convergence proof for the observer based on the Razumikhin theorem are given. Additionally, the proposed observer is utilized in an analytical-redundancy-based approach for sensor and actuator failure detection problem in the same class of time delay dynamical systems. Finally, the applicability and effectiveness of the proposed FDI scheme is illustrated through numerical examples.