Free energy calculations are fundamental to obtaining accurate theoretical estimates of many important biological phenomena including hydration energies, protein-ligand binding affinities and energetics of conformational changes. Unlike traditional free energy perturbation and thermodynamic integration methods, lambda-dynamics treats the conventional "lambda" as a dynamic variable in free energy simulations and simultaneously evaluates thermodynamic properties for multiple states in a single simulation. In the present article, we provide an overview of the theory of lambda-dynamics, including the use of biasing and restraining potentials to facilitate conformational sampling. We review how lambda-dynamics has been used to rapidly and reliably compute relative hydration free energies and binding affinities for series of ligands, to accurately identify crystallographically observed binding modes starting from incorrect orientations, and to model the effects of mutations upon protein stability. Finally, we suggest how lambda-dynamics may be extended to facilitate modeling efforts in structure-based drug design.