Pupil plane beam combination, spectral dispersion, detection, and fringe tracking are discussed for the IOTA interferometer. A new spectrometer design is presented in which the angular dispersion with respect to wavenumber is nearly constant. The dispersing element is a type of grism, a series combination of grating and prism, in which the constant parts of the dispersion add, but the slopes cancel. This grism is optimized for the display of channelled spectra. The dispersed fringes can be tracked by a matched-filter photon-counting correlator algorithm. This algorithm requires very few arithmetic operations per detected photon, making it well-suited for real-time fringe tracking. The algorithm is able to adapt to different stellar spectral types, intensity levels, and atmospheric time constants. The results of numerical experiments are reported.