Formic acid decomposes primarily to CO and H2O in the gas phase, but to CO2 and H-2 in the aqueous phase. Ab-initio quantum chemical calculations were performed using Hartree-Fock and density functional methods, to seek an explanation for this behavior The effect of water on the two decomposition pathways and on the isomerization of formic acid was determined. The transition state structures were fully optimized and include up to two wafer molecules. In the absence of water, dehydration is more favorable than decarboxylation. The presence of water reduces the activation barriers for both decomposition pathways, but decarboxylation is consistently more favorable than dehydration. The water molecules actively participate in the bond-breaking and bond-forming processes in the transition state. The reduction in the activation barriers with the addition of water indicates that water acts as a homogeneous catalyst for both dehydration and decarboxylation, whereas isomerization of formic acid occurs independently of water. Water has a strong effect on the relative stability of the formic acid isomers, acid-water complexes, and transition states. The relative stability of the transition states plays an important role in determining the faster decomposition pathway.