In this paper, we develop an immersed boundary (IB) method to simulate the dynamics of inextensible vesicles interacting with an incompressible fluid. In order to take into account the inextensibility constraint of the vesicle, the penalty immersed boundary (pIB) method is used to virtually decouple the fluid and vesicle dynamics. As numerical tests of our current pIB method, the dynamics of single and multiple inextensible vesicles under shear flows have been extensively explored, and compared with the previous literature. The method is also validated by a series of convergence study, which confirms its consistent first-order accuracy on the velocity field, the vesicle configuration, the vesicle area and the perimeter errors. In addition, the method is also applied to study a binary-component vesicle problem. (C) 2010 Elsevier Inc. All rights reserved.