Homophthalimides underwent facile diazo transfer reactions and the resulting diazo homophthalimides entered cycloaddition reactions with nitriles catalyzed by Rh₂(OAc)₄. The latter reaction represents the first example of 1,3-oxazole synthesis involving nitrile cycloaddition to an α-diazocarbonyl moiety incorporated in a heterocyclic system. The resulting oxazolo[5,4-c]isoquinolin-5(4H)-one scaffold represents a hitherto not described structural analog of an important cluster of tricyclic ring systems for drug design.