A divergent reaction of isocyanides with o-bromobenzaldehydes for the synthesis of isoindolinone-derived ketenimines and lactams was disclosed. The reaction features readily available reactants, relatively mild conditions, and high yields of products. Ketenimines could be applied in further transformations for access to other functional molecules. A mechanism study showed that the palladium-migration/imine-insertion process was the key step in this reaction.