An approach for solving inverse problems involving obstacles is proposed. The approach uses a level-set method which has been shown to be effective in treating problems involving moving boundaries. We develop two computational methods based on this idea. One method results in a nonlinear time-dependent partial differential equation for the level-set function whose evolution minimizes the residual in the data fit. The second method is an optimization that generates a sequence of level-set functions that reduces the residual. The methods are illustrated in two applications: a deconvolution problem, and a diffraction screen reconstruction problem.