The reaction of 2-aryl-3-hydroxyisoindolin-1-ones with the s-BuLi·TMEDA system in THF at -78 °C, affording a series of diastereomeric 3-aminoindan-1-ones via a novel rearrangement of the isoindolinone scaffold, is reported. It is proposed that α-elimination of LiOH from the transient N,O-dilithiated hemiaminal carbenoids leads to the formation of singlet carbenes followed by their trapping via an intramolecular C-H insertion. An alternative explanation based on an intramolecular Mannich reaction seem much less probable. A mechanistic-type study that combines spectroscopic data of the products and calculation results, with a special focus on the diverse lithiated intermediates that are most likely to engage in the title process (particularly those with internal Li bonds), is presented. The MP2 approach, including the NPA and QTAIM data, provided insight into structures and properties of all these species. Two reaction routes A and B appeared to be possible for the postulated carbene mechanism. An unusual metamorphosis of the CCN atom triad, from a near sp 1-azaallene-type in more stable noncarbene Li enolates to a roughly sp2 type in their carbene keto tautomers, is recognized in one of these pathways (route B). Dominant forms of resonance structures for the aforementioned tautomeric systems that have seven-membered quasi rings stabilized by Li+ ions bridging the N and carbonyl O atoms are indicated. Large computational difficulties arising from a huge impact of internal Li+ complexation on conformational preferences and electronic properties of carbonyl group-bearing lithium derivatives are also discussed. The new γ-keto carbene species under study belong to a subclass of acyclic aminoarylcarbenes.