Attempted use of (E)-3-arylidene-4-diazopyrrolidine-2,5-diones in the Rh(II)-catalyzed condensation with nitriles to form 1,3-oxazoles led to an unexpected outcome. The nitrilium ylide species thought to form on Rh(II)-catalyzed decomposition of diazo compounds underwent a cyclization onto the nearby arylidene moiety followed by 1,5-hydride shift. This led to the formation of a 2-benzazepine core which has special significance for drug discovery and can be considered a privileged scaffold.