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The projector-augmented wave (PAW) method proposed by Blöchl is an all-electron ab initio approach to electronic structure calculations. Using a local basis set expansion, the LSDA wave function is mapped onto a smooth image which can be treated with a plane wave basis set of a practical size. We discuss our implementation of this approach and its application to the calculation of the bonding properties of several second row and transition metal diatomic molecules. Comparisons are made between PAW and other methods. Our results for binding energy, bond length, and vibration frequency indicate that the accuracy of the PAW method is similar to that of local basis and finite grid methods. The convergence with respect to number of plane waves is sufficient that practical calculations are possible even for systems which would be difficult to treat with pseudopotential methods. For example, for the F2 and Fe2 dimers the bonding energy is converged with a 60 Ry cutoff in the plane wave expansion. The local basis contributions that appear in the theory can be precomputed, and therefore, the overhead typically associated with the local basis method is greatly reduced. For a fixed size of the plane wave basis set the execution times of the PAW method are similar to those of plane wave pseudopotential methods.