Presents a novel approach for the sensor fault diagnosis of time-delay systems by using an adaptive observer technique. The sensor fault is modeled as an additive perturbation described by a time varying function. Systems without model uncertainty are initially considered, followed by a discussion of a general situation where the system is subjected to either model uncertainty or external disturbance. An adaptive diagnostic algorithm is developed to diagnose the fault, and a modified version is proposed for general system to improve robustness. The stability of fault diagnosis system is proved. Finally, a numerical example is given to illustrate the efficiency of the proposed method.