A 5 wt.% Pd/theta-Al2O3 catalyst has been cycled in air at temperatures where the oxide PdO decomposes to Pd upon heating and reforms upon cooling. The microstructure of the Pd and PdO particles was studied using transmission electron microscopy (TEM), X-ray diffraction (XRD) and X-ray photoelectron spectroscopy (XPS). The extent of phase transformation was measured via thermogravimetric analysis (TGA). Our results confirm the observation reported previously by Farrauto et al, (Appl. Catal, A: General 81 (1992) 227) that the decomposition temperature (TD) of the PdO exceeds the oxide reformation temperature by a few hundred degrees K. TEM images provide insight into the morphology of the particles during the PdO --> Pd phase transformation. This phase transformation is initiated at the surface and causes small domains of Pd metal to form on the surface of PdO. These small domains of Pd metal are easy to reoxidize upon cooling. However, complete transformation of the PdO --> Pd at T>1198 K yields single crystal metal particles that are harder to oxidize during cooling in air. Appreciable amounts of bulk oxide do not form on the transitional alumina supported Pd unless the sample is cooled below 873 K. The hysteresis in the reformation of oxide during cooling is related to strongly bound oxygen on the Pd surface that inhibits bulk oxidation, The relationship between bulk oxide formation and the reactivity for methane oxidation was also examined. It was found that reactivation of the catalyst occurred before significant bulk PdO had formed. Samples quenched during this reactivation process were examined by XPS and TEM, and no evidence was seen for any redispersion during the reoxidation of the Pd metal. Extensive surface roughening appears to result from bulk oxide formation, which may explain the higher reactivity seen after catalyst cool-down.