In this paper, we study stability analysis and stabilization problems for a class of nonlinear two-dimensional (2-D) discrete systems with time-varying state delays, described by local state-space (LSS) Fornasini-Marchesini (FM) second model. The upper and lower bounds of time-varying state delays are positive integers and the nonlinearity satisfies Lipschitz condition. First, a stability criteria is proposed through introducing a new Lyapunov function. Then a dynamic output feedback controller is designed to assure the stability of nonlinear 2-D time-varying systems. Moreover, the output feedback system matrices can be obtained by solving linear matrix inequalities (LMIs). Finally, a numerical example is given to demonstrate the effectiveness of our results.