The paper presents preliminary results from the performance analysis of a methanol-fueled solid oxide fuel cell (SOFC) system incorporated with a palladium membrane reactor. A conventional SOFC system comprises major components of preheaters, a reformer, an SOFC unit and a burner. The performance of the SOFC unit was dependent on operating current density, fuel utilization and temperature. When the conventional reformer is replaced by a palladium membrane reactor, pure hydrogen is extracted from the reformed gas and fed to the anode of the SOFC unit. It was demonstrated that the incorporation of the palladium membrane reactor to the SOFC system could improve the performance of the SOFC unit. When the membrane reactor is operated at a hydrogen recovery of 90%, the maximum power density is about 12.6% higher than that from the system with the conventional reformer. The performance comparison between the two SOFC systems which provide the same net electrical efficiency indicates that the SOFC system with the membrane reactor requires a smaller SOFC stack than the conventional SOFC system; however, the former requires an extra cost on palladium membranes and extra electrical power for operating the compressor for the membrane reactor. The preliminary economic analysis reveals that the implementation of the membrane reactor to the SOFC system is not cost-effective due to high cost of palladium membranes. Finally it was indicated that the use of the palladium membrane reactor in the SOFC system is still technically attractive even when an SOFC cell with lower resistance can be further developed. (C) 2007 Elsevier B.V. All rights reserved.