We present a novel and efficient method for performing free energy calculations. Treating the conventional lambda variables associated with the "progress" in the chemical coordinates dynamically, our approach transforms free energy calculations into calculating potentials of mean force in the lambda-space with molecular dynamics. This extended Hamiltonian formalism utilizes the full power of umbrella sampling techniques and the weighted histogram analysis method. Applications to free energies of hydration and a model illustrating competitive binding calculations are presented. These calculations demonstrate the robustness and flexibility of the new lambda-dynamics approach.