The computer code system PENELOPE (version 2008) performs Monte Carlo simulation of coupled electron-photon transport in arbitrary materials for a wide energy range, from a few hundred eV to about 1 GeV. Photon transport is simulated by means of the standard, detailed simulation scheme. Electron and positron histories are generated on the basis of a mixed procedure, which combines detailed simulation of hard events with condensed simulation of soft interactions. A geometry package called PENGEOM permits the generation of random electron-photon showers in material systems consisting of homogeneous bodies limited by quadric surfaces, i.e., planes, spheres, cylinders, etc. This report is intended not only to serve as a manual of the PENELOPE code system, but also to provide the user with the necessary information to understand the details of the Monte Carlo algorithm.