The Pauson-Khand reaction represents a one-step Co-2(CO)(8)-catalyzed synthesis of cyclopentenone through [2 + 2 + 1] assembly of one molecule each of alkene, alkyne, and carbon monoxide. Density functional studies (B3LYP/631LAN) on the reaction pathway of the Pauson-Khand (PK) reaction reported here for the first time provides-valuable information on the structures and energetics of various intermediates and transition states. The PK reaction consists of olefin insertion, CO insertion, and reductive elimination steps. The olefin insertion step was found to be an irreversible step that determines the stereo- and regiochemistry of the overall reaction. The following steps are low activation energy processes and reversible. The bond-forming events occur only on one of the two metal atoms, while the second metal atom not only acts as an anchor that fixes the metal cluster to the organic substrate but also exerts electronic influences on the reaction at the first atom.