The mechanism for direct insertion of O-2 in a toluene-solvated palladium-hydride bond (avoiding palladium zero) has been elucidated using quantum mechanics (B3LYP/LACVP** with the PBF polarizable continuum solvent model) for Pd-II((-)-sparteine)(Cl)(H) and the model compound Pc-II(bipyridine)(Cl)(H). We find that the process involves (1) the abstraction of the hydrogen atom by triplet oxygen, (2) the formation of a stable (L2XPdOOH)-O-I triplet species, (3) a spin transition resulting in a stable (L2XPdOOH)-O-II singlet species, and (4) the loss of H2O2 and completion of the catalytic cycle upon the addition of HX. The limitations involved in the spin transition, the formation of the triplet Pd-I-OOH species and the stability of that triplet species are all dependent on the presence of an H-bond acceptor cis to the hydride and the electronic characteristics of the other ligands which may or may not stabilize the Pd-I species. Without this cis H-bond acceptor and/or electron-withdrawing ligands that can stabilize Pd-I, the reaction will not proceed via the palladium hydride insertion mechanism in a nonpolar environment.