This study tackles the problems of exponential stability analysis and model reduction for spatially interconnected discrete-time systems with time-varying delay. The well-posedness, exponential stability, and contractiveness of spatially interconnected discrete-time systems subject to time-varying delay are defined and a sufficient condition in terms of linear matrix inequality (LMI) is put forth to test these properties. By exploiting the above analysis result, a sufficient condition for guaranteeing the existence of a reduced-order system is derived. With the help of Finsler lemma, a reduced-order system is derived based on the LMI method. By taking advantage of the same method, a delay-free reduced-order system for a given spatially interconnected discrete time-varying delay system can also be attained. Finally, two examples have been carried out to show the feasibility and validity of the derived theories.